Question

On January 1, 2018, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:
Moody Osorio
Cash $ 180 $ 40
Receivables 810 180
Inventories 1,080 280
Land 600 360
Buildings (net) 1,260 440
Equipment (net) 480 100
Accounts payable (450 ) (80 )
Long-term liabilities (1,290 ) (400 )
Common stock ($1 par) (330 )
Common stock ($20 par) (240 )
Additional paid-in capital (1,080 ) (340 )
Retained earnings (1,260 ) (340 )
- Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. 9) what amount was recorded as goodwill arising from this acquisition?
a. $230.
b. $120.
c. 520.
d. None, there is an gain on bargain purchase of $230.
e. None. there is a gain on bargain purchase of $265.

Answer 1

Answer:

d. None, there is an gain on bargain purchase of $230.

Explanation:

Total Consideration Paid = Long term liabilities + Common Stock + Excess of fair value of stock over par value

Long-term liabilities =  $400, Common Stock (Par Value): $1.00 * 40 shares = $40, Excess of fair value of stock over par value = ($10 - $1) x (40 shares) = $9*40 = $360

Total Consideration: $400 + $40 + $360 = $800

Particulars                                                         Amount

Total consideration paid                                    $800

Less: Fair value of asset

Cash                            $40

A. Receivables            $180

Inventory                     $290

Land                             $400

Buildings                      $500

Equipment                   $100

Long term liabilities   -$400

Accounts payable      -$80                                   $1,030

Excess of fair value of acquisition price           ($230)

Thus, there is no goodwill but gain on bargain purchase of $230.