Question

On January 1, 2014, Midwest Co. purchased 50% of the outstanding voting stock of Gill Co...

On January 1, 2014, Midwest Co. purchased 50% of the outstanding voting stock of Gill Co for $500,000. The book value of Gill's net assets on the acquisition date was $800,000. Gill's depreciable assets with a ten-year remaining life had a fair value that was $100,000 more than the book value (Midwest's share of this amount is $50,000). The amount of good will associated with this investment is
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Answer #1

Since the investment is 50%, Midwest co. is said to have significant influence over Gill co.
Hence, the investment shall be accounted using the equity method.
Goodwill = Purchase price - Share of Investor in Investee's Fair value of Net Assets.
Purchase price = $500,000.
Fair value of Gill co.'s net assets = $900,000
Note: It is given that Fair value of Gill co.'s net assets is more than book value due to a depreciable asset which has Fair value greater than book value by $100,000. Book value (given) = $800,000.
Therefore Fair value = $800,000 + $100,000 = $900,000
Of the above, share of Midwest co. = $900,000 * 50% = $450,000.

Therefore goodwill = $500,000 - $450,000
= $50,000.

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