On July 1 2016 an acquiring company paid 1275000 for 100 of

On July 1, 2016, an acquiring company paid $1,275,000 for 100% of the outstanding common stock of an investee company in a transaction that qualifies as a business combination. Immediately preceding the transaction, the investee company had the following condensed balance sheet:

The acquisition-date fair value of the property and equipment was $230,000 more than its carrying amount. For all other assets and liabilities, the pre-acquisition amounts reported on investee’s balance sheet were equal to their respective fair values.

Investment accounting by parent before consolidation

1. What amount of goodwill related to the acquisition of the investee must the acquiring company report in pre-consolidation parent-only balance sheet immediately following the acquisition of investee company common stock?

$375,000

$220,000

$145,000

$0

2. What amount of goodwill related to the acquisition of the investee must the acquiring company report in its consolidated balance sheet immediately following the acquisition of investee company common stock?

$375,000

$220,000

$145,000

$0

Pre-acquisition amounts reported on investee\'s balance sheet $200,000 Current assets Property and equipment, net 1,500,000 Liabilities Equity 800,000 900,000

Solution

1. Amount of Goodwill : $145,000 as calculated below

Cost of acquisition to Acquiring Company is $ 1,275,000

Total Assets and Liablities acquired :

Current Assets : $200,000

Property and Equipment : $1,500,000 + $ 230,000 appreciation = $1,730,000

Liabilities : $800,000

Sundry asstes acquired net of liabilities :- $1,130,000 ( $1,730,000 + $200,000 - $800,000

Goodwill : $145,000 ( $1,275,000 - $1,130,000 )

2. Amount of Goodwill report in its Consolidated Balance Sheet is

$145,000 which is amount paid in excess of acquisition of Sundry Assets and liablities.