Question

On January 1, 2016, Everett, Inc. purchased Barber Corporation for $750,000. On that date the net...

On January 1, 2016, Everett, Inc. purchased Barber Corporation for $750,000. On that date the net assets of Barber had a book value of $450,000, and book values were equal to fair values with the following exception:

FIFO Inventory- Undervalued, $15,000

Land- Undervalued, $30,000

Equipment (4 years life)- undervalued, $40,000

Patent (10 year life)- undervalued, $60,000

During 2016, Everett had income from its own operations of $180,000 and Barber had net income of $75,000. What amount of goodwill appeared on the consolidated balance sheet at Dec 31, 2016?

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Answer #1

Goodwill=( Consideration paid - Fair value of net assets)

In this question, Everett Inc. purchased Barber corporation for a consideration of $750000.

The Book value of net assets of Barber was $45000. So, the Fair value would be:-

Fair value= (Book value + Undervalued figures in book value)= 450000+15000+30000+40000+60000= $595000

Goodwill is calculated on the date of purchase and it remains same even at the year end date. So, Net income of Everett and barber during 2016 has no relevance in the calculation of Goodwill.

So, goodwill as on Dec 31,2016 (in consolidated balance sheet)= 750000 - 595000= $ 155000

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