Question

Firenze Company developed a specialized banking application software program that it licenses to various financial institutions through multiple-year agreements. On January 1, 2018, these licensing agreements have a fair value of $850,000 and represent Firenze's sole asset. Although Firenze currently has no liabilities, the company has a $180,000 net operating loss (NOL) carryforward because of recent operating losses.

On January 1, 2018, Parma, Inc., acquired all of Firenze's voting stock for $1,046,000. Parma expects to extract operating synergies by integrating Firenze's software into its own products. Parma also hopes that Firenze will be able to receive a future tax reduction from its NOL. Assume an applicable federal income tax rate of 35 percent.

If there is a greater than 50 percent chance that the subsidiary will be able to utilize the NOL carryforward, how much goodwill should Parma recognize from the acquisition?

If there is a less than 50 percent chance that the subsidiary will be able to utilize the NOL carryforward, how much goodwill should Parma recognize from the acquisition?

a.	Goodwill
b.	Goodwill

Answer 1

NOL = $180000

Federal income tax rate = 35%

Therefore,

Deferred tax asset = $180000 x 35% = $63000

A.

Since there is a greater than 50 percent chance that the subsidiary will be able to utilize the NOL carry forward, goodwill calculation will take into consideration the amount of deferred tax asset.

Therefore,

Goodwill = Price paid to acquire all of Firenze software - Fair value of the licensing agreements - Deferred tax asset

,Goodwill = $1,046,000 - $850,000 - $63,000 = $1,33,000

.

B.

Since there is less than 50 percent chance that the subsidiary will be able to utilize the NOL carry forward, goodwill calculation will not take into consideration the amount of deferred tax asset.

Goodwill = Price paid to acquire all of Firenze software - Fair value of the licensing agreements

Goodwill = $1,046,000 - $850,000 = $196,000