Question

On January 3, 2021, Madison Corp. purchased 30% of the voting common stock of Huntsville Co., paying $3,000,000. Madison decided to use the equity method to account for this investment. At the time of the investment, Huntsville’s total stockholders’ equity was $8,000,000. Madison gathered the following information about Huntsville’s assets and liabilities: Book Value Fair Value Buildings (10-year life) $ 400,000 $ 600,000 Equipment (5-year life) 1,200,000 1,400,000 Franchises (8-year life) $ 0 $ 480,000 For all other assets and liabilities, book value and fair value were equal. Any excess of cost over fair value was attributed to goodwill, which has not been impaired.

b. What is the amount of goodwill associated with the investment

Answer 1

Buildings (600,000 – 400,000)                                                                        200,000

Equipment (1,400,000 – 1,200,000)                                                               200,000

Franchises (480,000 – 0)                                                                                480,000

Excess fair value                                                                                             880,000

Identifiable Excess paid        =      880,000*30%

                                                   =$264,000

Book value acquired                 =8,000,000*30%

                                                       $2,400,000

Goodwill        =Amount paid to acquire Huntsville co – book value acquired – Identifiable Excess paid

                        = 3,000,000 – 2,400,000 – 264,000

Goodwill   =$336,000

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