Question

On October 7, 2017, Grey Knight purchased a going business for the lump-sum price of $200,000. The fair market values of the assets Grey purchased were as follows:

U.S. government securities $10,000

Land $36,000

Building $90,000

Equipment $15,000

Furniture $9,000

What is Grey’s basis in the building?

a. $90,000.b. $95,000.c. $100,000. d.        $102,500.

My answer is (a) 90,000(FMV) total of assets was 10,000.00+36,000+15,000+9,000=70,000

200,000 lump sum-70,000(total assets)=130,000

130,000-90,000(FMV building)=40,000 left. How am I supposed to allocate the 40,000? also isn't Grey's basis in the building the FMV at the time received?

Answer 1

The term excess of cost over fair market value of net assets refers to the difference between the price paid for a bundle of assets and their net value (as determined through a professional appraisal).

Determining the excess of cost over fair market value is typically required when one business buys another, with the excess cost being applied to goodwill on the balance sheet.

Goodwill = Purchase Price - (Fair market value of asset - Liabilities)

Hence answer is A