Question

TX, Inc., dominates the snack-food industry with its Salty Chip brand. Assume that TX purchased Amazing Chips Company for $5.9 million cash. The market value of Amazing Chips' assets is $6 million, and Amazing Chips has liabilities with a market value of $5.0 million. Read the requirements. Requirement 1. Compute the cost of the goodwill purchased by TX. (Enter amounts in millions to the nearest tenth of a million as provided in the problem statement, X.X.) Less: Cost of goodwill Requirements 1. Compute the cost of the goodwill purchased by TX. 2. Explain how TX will account for goodwill in future years. Print Print Done Done

Answer 1

Requirement 1: Computation of cost of goodwill purchased by Tx Inc.

Cost of goodwill = Purchase price - Fair market value of net assets acquired

Purchase price = $5.9 million

Fair market value of net assets = Fair market value of assets - Fair market value of liabilities

                                              = $6.0 million - $5.0 million

                                              = $1.0 million

Cost of Goodwill
Purchase Price	$5.9 Million
Less: Fair Market value of net assets	$1.0 Million
Cost of Goodwill	$4.9 Million

2. In case of private companies,they can amortize the goodwill amount on a straight line basis over a period of 10 years or less. Within 10 years the goodwill amount should be completed amortized.

However,public companies should carry Goodwill as an asset and evaluate it for impairment at least once a year.