Question

Goodwill

Mills Company is considering purchasing EKC Company. EKC's balance sheet at December 31, 2019, is as follows:

Cash	$55,000		Current liabilities	$50,000
Accounts receivable	68,000		Bonds payable	174,000
Inventory	140,000		Common stock	225,000
Property, plant, and equipment (net)	550,000		Retained earnings	364,000
	$813,000			$813,000

At December 31, 2019, Mills discovered the following about EKC:

1. No allowance for uncollectible accounts has been established. An allowance of $6,000 is considered appropriate.
2. The LIFO inventory method has been used. The FIFO inventory method would be used if EKC were purchased by Mills. The FIFO inventory valuation of the December 31, 2019, ending inventory would be $197,000.
3. The fair value of the property, plant, and equipment (net) is $670,000.
4. The company has an unrecorded patent that is worth $100,000.
5. The book values of the current liabilities and bonds payable are the same as their market values.

Required:

1. Compute the value of the goodwill if Mills pays $1,275,000 for EKC.

$

2. Next Level Why would the book value of a company's identifiable net assets differ from its market value?

Answer 1

Solution : 1) working for difference with book value : Particulars Amount in $ Inventory (197,000.-- 140,000) 57,000 Property, plant & Equipment 1,20,000 (670,000 - 550,000) Less: Allowance for uncollectible 6,000 accounts Umrecorded Patent 1,00,000 Total 271,000 Book value adjusting - 271,000 Computation of Goodwill : - Particulars Amount in & Purchase considenation 1, 275,000 Book value(225,000 + 364,000) 589,000 Book value adjustment (working) 271,000 Less: Net Assets Purchased 860,000 Goodwill 415,000 2) * Acquiren paid too much. * Assets listed on the balance sheet at amounts different from their market value. * Identifiable integi ble assets may be inseconded or under valued. Because paying too much for asset acquined, mon srecording of intangible assets and showing assets on historical cost. can be the reason for difference in book value with market value.