Question

Grammy Co. has acquired ABC Inc. for $10 million. Before merger, Grammy Co. had a market...

Grammy Co. has acquired ABC Inc. for $10 million. Before merger, Grammy Co. had a market value of $20 million and a book value of $15 million. However, ABC’s book value and market value were similar and equal to $7 million before merger. Is there any goodwill in the balance sheet of the merged firm? If yes, what is the amount of this goodwill? *

A- There is a goodwill of $10 million

B- There is a goodwill of $3 million

C- There is a goodwill of $7 million

D- There is no goodwill

E- None of the above

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Homework Answers

Answer #1
  • Goodwill is an intangible asset that is associated with the purchase of one company by another.
  • Goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process.

In the case of Grammy Co., it has acquired ABC Inc.for $ 10 Million whereas its market value is $ 7 mn only.

When the merged balance sheet of the company will be made, the difference between market value and price paid for the assets of ABC Inc will be recognised as Goodwill.

Goodwill = 10Mn - 7 Mn

   = $ 3mn
Option B is correct.

Note: Difference between Grammy's own market value and book value will not be recognised as Goodwill. Because internally generated goodwill is not recognised.

Hope you understand the solution.

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