Question

AB is a private not-for-profit entity. It acquires YZ, another private not-for-profit entity. The acquisition value is $0.97 million. YZ has net assets with a book value of $576,000 but a fair value of $673,000. Officials for AB expect that YZ will be predominantly supported by contributions in the future. After the acquisition, what amount of goodwill will be reported on the combined balance sheet?

Multiple Choice

a. $0

b. $97,000

c. $394,000

d. $297,000

Answer 1

Answer:

Option (a) $0 is correct.

In the given case of AB and YZ it is expected that in future the acquired organization will be predominantly supported by contributions. Therefore no goodwill should be recognized by the acquire on combined balance sheet. Instead the acquirer should report the excess of the total acquisition value over the fair value of all the identifiable assets and liabilities as a reduction in the unrestricted net assets on the statements of activities.