Computing Goodwill and Patents
Elizabeth Pie Company has been in business for 50 years and has developed a large group of loyal restaurant customers. Giant Bakery Inc. has made an offer to buy Elizabeth Pie Company for $5,000,000. The book value of Elizabeth Pie’s recorded assets and liabilities on the date of the offer is $4,300,000 with a fair value of $4,500,000. Elizabeth Pie also (1) holds a patent for a pie crust fluting machine that the company invented (the patent with a fair value of $300,000 was never recorded by Elizabeth Pie because it w as developed internally) and (2) estimates goodwill from loyal customers to be $310,000 (also never recorded by the company). Should Elizabeth Pie Company management accept Giant Bakery’s offer of $5,000,000? If so, compute the amount of goodwill that Giant Bakery should record on the date of the purchase.
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