Question

Firenze Company developed a specialized banking application software program that it licenses to various financial institutions through multiple-year agreements. On January 1, 2018. these licensing agreements have a fair value of $930,000 and represent Firenze's sole asset. Although Firenze currently has no liabilities, the company has a $161.000 net operating loss (NOL) carryforward because of recent operating losses. On January 1, 2018. Parma, Inc., acquired all of Firenze's voting stock for $1.140.000. Parma expects to extract operating synergies by integrating Firenze's software into its own products. Parma also hopes that Firenze will be able to receive a future tax reduction from its NOL. Assume an applicable federal income tax rate of 35 percent. a. If there is a greater than 50 percent chance that the subsidiary will be able to utilize the NOL carryforward, how much goodwill should Parma recognize from the acquisition? b. If there is a less than 50 percent chance that the subsidiary will be able to utilize the NOL carryforward, how much goodwill should Parma recognize from the acquisition? a Goodwill b. Goodwill

Answer 1

ANSWER:

a) Excess of price paid over fair value of asset acquired = Price paid - Asset fair value

= 1140000 - 930000

= 210000

Deferred tax asset to be created = NOL * Tax rate = 161000 * .35 = 56350

Goodwill = 210000 - 56350 = 153650

b) Since there are less than 50% to offset this loss (NOL) there will no deferred tax asset created. Accordingly

Goodwill = 210000

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