Question

Exercise 2-11 Relation between Purchase Price, Goodwill, and Negative Goodwill LO 6 The following balance sheets were reported on January 1, 2019, for Peach Company and Stream Company: Peach Stream Cash $ 100,000 $ 20,000 Inventory 300,000 100,000 Equipment (net) 880,000 380,000 Total $1,280,000 $500,000 Total Liabilities $ 300,000 $100,000 Common stock, $20 par value 400,000 200,000 Other contributed capital 250,000 70,000 Retained earnings 330,000 130,000 Total $1,280,000 $500,000 Required: Appraisals reveal that the inventory has a fair value of $120,000, and the equipment has a current value of $410,000. The book value and fair value of liabilities are the same. Assuming that Peach Company wishes to acquire Stream for cash in an asset acquisition, determine the following cutoff amounts: A. The purchase price above which Peach would record goodwill. B. The purchase price below which the equipment would be recorded at less than its fair market value. C. The purchase price below which Peach would record a gain. D. The purchase price below which Peach would obtain a "bargain." E. The purchase price at which Peach would record $50,000 of goodwill.

Answer 1

page; or Answer Requüyed: (A) would record goodwill when the purchase parece exceeds the fair value of identifrable net assets $$450000 The company poultimous Amount Amount Book value of assets $500000 less: Book value of liabilities $ 100.000 Book value of net assets $ 400000 Add: fain volue adjustments myentdy waite uplt120000 – $1000001) $120000 Equipment write up ($410000 - $380.000) ${30000 50000 Fair value of identifiable net assets $450000 The equipment would not be recorded at a price less than the 'its fair market value unless there is an (B) NO, impairment (c) The company would show an extrodinary gain when the purchase price is below the fair value of identi- - fiable net assets of $ 450000 (D) The company would second a g gain bargain purchase when the purchase price is below $ 450000. would record a company $ 150000 goodwill 8 of when it acquires the company at at $ 500000 ( $450000 + $50000) (E) The