Question

Midlothian acquires 100 percent of the outstanding voting shares of Cedar Company on January 1, 2020. To obtain these shares, Midlothian pays $400,000 cash and issues 20,000 shares of $1 par value common stock on this date. Midlothian’s stock had a fair value of $10 per share. Midlothian also pays an additional $3,000 in stock issuance costs. At date of acquisition, the book values and fair values of Cedar's net assets amounted to $450,000 and $520,000, respectively. What amount was reported for goodwill as a result of this acquisition?

Answer 1

Answer:

$83,000

Explanation:

goodwill = price paid for the company - fair value of net assets

• price paid for the company = $400,000 + (20,000 x $10) +$3,000 = $603,000
• fair value of net assets = $520,000

goodwill = $603,000 - $520,000 = $83,000

Goodwill is basically the excess between a company's acquisition price and the fair value o fits net assets. Goodwill is an intangible asset that is generally impaired (not amortized) during a 10 year period.