Question

On December 31, Year 1, Company A purchased 75% of Company B’s outstanding common shares for $150,000 in cash. On that date, the carrying amount of Company B’s assets and liabilities approximated their fair value, and the fair value of the noncontrolling interest (NCI) was $12,000. The following is the summarized balance sheet information for the two companies on December 31, Year 1, before the acquisition.

	Company A	Company B
Current assets	$200,000	$ 80,000
Noncurrent assets	320,000	140,000
Current liabilities	70,000	45,000
Noncurrent liabilities	110,000	55,000
Common stock	100,000	30,000
Retained earnings	90,000	70,000
Additional paid-in capital	150,000	20,000

Additional information:

- Company B reported net income of $60,000 for the year ended December 31, Year 2.

- On December 1, Year 2, Company B declared and distributed a cash dividend of $40,000 to its common shareholders.

- On November 15, Year 2, Company A declared and distributed a cash dividend of $25,000 to its common shareholders.

- Company A reported net income of $110,000 in its separate statements for the year ended December 31, Year 2.

- In its separate statements, Company A accounts for its investment in Company B using the equity method.

- During Year 2, no shares of common stock were issued and no items of other comprehensive income were recognized either by Company A or by Company B.

- No intraentity transactions occurred during Year 2.

Use the information above to determine the amount of goodwill or gain from bargain purchase recognized by Company A on the business combination date.

Answer 1

Note : Since we have only been asked to calculate the goodwill or gain from bargain purchase on the business combination date, i.e., the acquisition date on which buyer acquired seller's business(which is December 31, Year 1), we have not considered the additional information as it belongs to Year 2 and is not relevant for our computation.

Answer :

Calculation of Goodwill / Gain from Bargain Purchase
Particulars	Amount($)
Cash paid to acquire the company	1,50,000
Add : Fair Value of Non-Controlling Interest	12,000
Less : Fair value of identifiable net assets (Refer note below)	-1,20,000
Goodwill as on business combination date	42,000
Note : Calculation of Identifiable Net Assets
Particulars	Amount($)
Current Assets	80,000
Non-Current Assets	1,40,000
Less : Liabilities
Current liabilities	-45,000
Non current liabilities	-55,000
Fair Value of identifiable net assets	1,20,000