Question

Pinacho Company acquired 80 percent of the stock of Sabastian Corp. on December 31, 2008. The...

Pinacho Company acquired 80 percent of the stock of Sabastian Corp. on December 31, 2008. The stockholder's equity section of Sabastian's balance sheet at that date amounted to $1,200,000 Pinacho financed the acquisition by using $720,000 cash and giving a note payable for $304,000. Book value approximated fair value for all of Sabastian's assets and liabilities except for land which had a fair value $20,000 more than its book value, and for buildings which had a fair value $35,000 more than its book value and a remaining useful life of 10 years. Any remaining differential was related to goodwill. Pinacho has an account payable to Sabastian in the amount of $30,000. The amount of goodwill resulting from this business combination is:

Select one:

a. $ 9,000

b. $ 20,000

c. $ 36,000

d. $ 25,000

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Answer #1

The value of goodwill is arrived as below:

Goodwill = Total Consideration - Book Value of Equity*Percentage Acquired - Excess of Land's Fair Value Over Book Value - Excess of Building's Fair Value Over Book Value

Here, Total Consideration = Cash + Notes Payable = 720,000 + 304,000 = $1,024,000, Book Value of Equity = $1,200,000, Percentage Acquired = 80%, Excess of Land's Fair Value Over Book Value = $20,000 and Excess of Building's Fair Value Over Book Value = 35,000

Using these values in the above formula for Goodwill, we get,

Goodwill = 1,024,000 - 1,200,000*80% - 20,000 - 35,000 = $9,000

Answer is $9,000 (which is Option A).

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