Question

The Whit Company, a manufacturer, and the Berry Company, a retailer, entered into a business combination whereby Whit acquired for cash all the outstanding voting common stock of Berry. Assuming that the business combination resulted in goodwill, indicate how the amount of goodwill is determined.

Answer 1

Once the cost of the acquisition has been allocated to all identifiable assets and liabilities of the acquired company, the remaining excess of cost over fair value, if any, is allocated to goodwill. If cost is less than the total values assigned to the identifiable net assets, the remainder (the excess of fair value over cost) is allocated as a pro-rata reduction of the amounts assigned to all of the acquired assets except (1) financial assets other than those accounted for under the equity method, (2) assets to be disposed of by sale, (3) deferred tax assets, (4) prepaid pension assets or prepaid otherpostretirement benefits (OPEB) assets, and (5) any other current assets. If an excess remains after this allocation, it is recognized in the income statement as an extraordinary gain.