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31 August, 18:27

At the beginning of the year, Parent Company purchased all 500,000 shares of Sub Incorporated for $15 per share. Just before the acquisition date, Sub's balance sheet reported net assets of $6 million. Parent determined the fair value of Sub's property and equipment was $1 million higher than reported by Sub. What amount of goodwill should Parent report as a result of its acquisition of a Sub?

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  1. 31 August, 21:07
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    The amount of goodwill that Parent should report as a result of its acquisition of a Sub is $500,000

    Explanation:

    The calculate of the goodwill of a company at its acquisition you have to subtract the total fair market value of its assets and liabilities from the price paid.

    For this case:

    Price of purchase: 500,000 shares at $15 per share that is $7,500,000

    Fair market value of its assets and liabilities is $7,000,000 ($6,000,000 + $1,000,000) The value of net assets reported by Sub's + $1,000,000 extra determined by parets as fair value.

    $7,500,000 - $7,000,000 = $500,000
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