Question

Cash Inventory Equipment (net) Total Wood $150,000 450,000 1,320,000 $1,920,000 Rose $30,000 150,000 570,000 $750,000 Total liabilities Common stock, $20 par value Other contributed capital Retained earnings Total $450,000 600,000 375,000 495,000 $1,920,000 $150,000 300,000 105,000 195,000 $750,000 Required: Appraisals reveal that the inventory has a fair value $180,000, and the equipment has a current value of $615,000. The book value and fair value of liabilities are the same. Assuming that Wood Company wishes to acquire Rose for cash in an asset acquisition, determine the following cutoff amounts: A. The purchase price above which Wood would record goodwill. B. The purchase price at which Wood would record a $50,000 gain. C. The purchase price below which Wood would obtain a "bargain." D. The purchase price at which Wood would record $75,000 of goodwill.

Answer 1

Solution

a. Determination of the purchase price above which would Wood record goodwill:

Computations –

Fair value of identifiable net assets –

Book value 750,000 – 150,000 = 600,000

Write up of inventory and equipment $75,000

(inventory – 180,000 – 150,000 = 30,000; equipment 615,000 – 570,000 = 45,000)

Purchase price above which Wood would record goodwill = $675,000

b. Determination of the purchase price at which Wood record a $50,000 gain:

A ‘gain’ occurs when there is a difference in the purchase price and the fair value. Hence, when the purchase price is less than fair value, it results in a gain.

Fair value of net identifiable assets = $675,000

Less: gain $50,000

Hence, purchase price at which Wood record a $50,000 gain is $625,000.

Note – the company would eliminate any existing goodwill prior to recording a gain.

c. Determination of the purchase price below which would obtain a ‘bargain’:

A ‘bargain’ results when assets are acquired for less than fair value.

Computed purchase price - $675,000

Wood would consider any price below $675,000 as ‘bargain’.

d. Determination of the purchase price at which Wood would record $75,000 goodwill:

Goodwill results when the consideration paid exceeds the fair value of identifiable assets.

Fair value of net identifiable assets = $675,000

Add: Goodwill $75,000

Hence, purchase price at which Wood record $75,000 goodwill = $750,000