Question

Mainline Produce Corporation acquired all the outstanding common stock of Iceberg Lettuce Corporation for $38,000,000 in cash. The book values and fair values of Iceberg’s assets and liabilities were as follows:
Book Value Fair Value
Current assets $ 11,800,000 $ 14,800,000
Property, plant, and equipment 24,000,000 30,000,000
Other assets 2,200,000 3,200,000
Current liabilities 6,600,000 6,600,000
Long-term liabilities 11,400,000 10,400,000
Required:
1. Calculate the amount paid for goodwill.

Answer 1

Answer: The Goodwill is $7,000,000

Explanation:

$

Purchase price. 38,000,000

Less:

Fair value of asset 48,000,000

Less: Fair value of liabilities 17,000,000

-----------------------

Fair value of net Asset. 31,000,000

---------------------

Goodwill. 7,000,000

-------------------------

Workings

Fair value of Asset = Current Asset + Property, plant and equipment + Other asset

= 14,800,000 + 30,000,000 + 3,200,000

= 48,000,000

Fair value of Liabilities = Current Liability + Long term Liability

= 6,600,000 + 10,400,000

= 17,000,000

Answer 2

Answer:

$7 million

Explanation:

Make Adjustments between the Book Values and the Fair Values

                                             All values are in $Million(s)

                              Book Value      Fair Value         Adjusted

Current Assets         11.8                    14.8                    3

Fixed Assets             24                     30                      6

Other Assets            2.2                     3.2                     1

Current Liabilities    (6.6)                   (6.6)                   (0)

LT Liabilities             (11.4)                  (10.4)                   1

Equity                        20                     31                       11

Now, we would calculate the excess purchase price which is the difference between the $38 million paid by Mainline Produce Corporation in order to acquire Iceberg Lettuce Corporation and the net book value of the assets

Excess purchase price = 38 - 20 = $18 million

Goodwill = Excess purchase price - Fair value adjustments

               = $18 million - $11 million

             = $7 million

The goodwill paid is $7 million