Question

Compute the amount of acquired Goodwill, including contingent earnings and bargain purchase

Assume that you are charged with assigning fair values related to a $1,520,000 acquisition. You determine that the fair value of the net identifiable tangible assets is $740,000. You also conclude that the purchase included a Customer List with a fair value at $136,000.

a. How much Goodwill will you record in this acquisition?

b. Continuing from part (a), now also assume that the purchase and sale agreement requires the payment of an additional $370,000 if the subsidiary achieves a certain level of earnings. You estimate the fair value of that contingent earnings clause in the agreement to be $88,000. How does this additional information affect your computation of Goodwill? The amount of Goodwill recorded is

c. This part of the exercise is independent of parts (a) and (b). Assume that the purchase price is $1,520,000 and that fair value of the net identifiable tangible assets is $740,000. You also conclude that the purchase included a Customer List that you value at $256,000 and a Patent valued at $760,000. How much Goodwill will you record in this acquisition? The amount of Goodwill recorded is:

Answer 1

A) Calculation of goodwill= purchase consideration - fair value of tangible assets - debtors= 1,520,000-740,000-136,000=$644,000.

B) Calculation of additional goodwill= Agreement price - fair value of earnings= $370,000 - $88,000 =$282,000(additional goodwill)

This will result an increase in the goodwill for $282,000.Goodwill amount = $644,000+$282,000= $926,000.

C) Calculation of goodwill= Purchase Consideration - fair value of tangible assets - patent = $1,520,000-$740,000-$256,000-$760,000=(236,000)

Negative goodwill/ bargain purchase = $236,000