Problem 12-4 (Part Level Submission) On July 31, 2017, Blossom Company paid $2,9
ID: 2400813 • Letter: P
Question
Problem 12-4 (Part Level Submission) On July 31, 2017, Blossom Company paid $2,900,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Blossom. Conchita reported the following balance sheet at the time of the acquisition. Current assets Noncurrent assets $750,000 Crrent liabilities 2,600,000 Long-term liabilities $3,350,000 Stockholders equity $530,000 430,000 2,390,000 $3,350,000 Total assets Total liabilities and stockholders' equity It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,590,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses tor the foreseeable future. At December 31, 2017, Conchita reports the tollowing balance sheet intormation Current assets Noncurrent assets including goodwill recognized in purchase) Current liabilities Long term liabilities $410,000 2,190,000 (640,000) (440,000) $1,520,000 Net assets It is determined that the fair value of the Conchita Division is $1,850,000. The recorded amount for Conchita's net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value $110,000 above the carrying value Compute the amount of goodwill recognized, if any, on July 31, 2017. The amount of goodwillExplanation / Answer
If we adopt book value approach for calculation of goodwill then goodwill can be calculated as under:
Step 1: Net Assets:
Total Assets: $3350000
(-) Current Liabilities: $530000
(-) Long Term Liabilities: $430000
= Net Assets: $2390000
Step 2: Purchase Consideration: $2900000
Step 3: Goodwill = Purchase Consideration - Net Assets
= $2900000 - $2390000
= $510000
If we adopt fair value approach then computation of goodwill will be as follows:
Step 1: Net Assets: $2590000
Step 2: Purchase Consideration: $2900000
Step 3: Goodwill = Purchase Consideration - Net Assets
= $310000
In both of the methods above, since goodwill is being computed as on 31st July, 2017 the effect of losses made over the next 6 months of operations is not taken into consideration.