Question

The answer to the question is B, $50,000 (according to the solutions manual). My question is why is Pop's investment cost of $1,400,000 being added to the underlying book value of Son's net assets to find the amount of goodwill?

According to my textbook, the cost of investment minus the underlying book value is equal to the amount that is assigned to goodwill. So I got, cost of investment of $1,400,000 minus ( 25% interest acquired x Stockholder's equity of 4,000,000) = 1,400,000 - 1,000,000 = 400,000 assigned to goodwill.

Son's Corporation's stockholders' equity at Dec 31, 2016, follows (in thousands):

Capital stock	3,000
Additional paid in capital	500
Retained earnings	500
Total stockholders' equity	4,000

On January 3, 2017, Son sells 10,000 shares of previously UNISSUED $100 par common stock to Pop Corporation for $1,400,000. On this date the recorded book values of Son's assets and liabilities equal fair values. Goodwill from Pop's investment in Son at the date of purchase is:

a.) $0    b.) 50,000    c.) 300,000    d.) 400,000

    This is the answer:

	Cost of 10,000 of 40,000 shares outstanding	$1,400,000
	Book value of 25% interest acquired ($4,000,000 stockholders’ equity at December 31, 2016 + $1,400,000 from additional stock issuance) 25%	1,350,000
	Excess fair value over book value(goodwill)	$   50,000

Answer 1

Cost of investment = 1400000

However with the issuance of stock by 1400000 by Son corporation will also increase the book value of stockholders' equity. Therefore 1400000 is added to 4000000 and total stockholders' equity comes to 5400000. Its 25% will give 1350000. So, your understanding regarding the calculation of goodwill is true but you need to understand the addition of stock issuance to book value too. Good luck