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31 March, 18:46

4. Suppose an acquiring firm pays $100 million for a target firm and the target's assets have a book value of $70 million and an estimated replacement value of $80 million. What amount would be allocated to the acquiring firm's goodwill account?

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  1. 31 March, 19:26
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    The question is missing below options:

    A. $0 million B. $20 million C. $30 million D. $70 million E. $80 million

    The correct option is B,$20 million

    Explanation:

    Goodwill = Purchase consideration less fair value of net assets acquired

    Purchase consideration is $100 million

    Fair value of net assets is $80 million, the replacement value

    Goodwill=$100 million - $80 million

    Goodwill=$20 million

    Provided the replacement value was not given, the book value of $70 million would have been a proxy for the fair value, hence giving a goodwill of $30 million ($100 million less $70 million)

    Option D is wrong because goodwill is not the same as book value of assets

    Option E is wrong because the replacement value of asset is goodwill.
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