Assume that one of your clients asks for your assistance in allocating the $3,00
ID: 2415074 • Letter: A
Question
Assume that one of your clients asks for your assistance in allocating the $3,000,000 cost of a 100% acquisition of a competitor firm. You estimate the fair value of the net assets on the investee's balance sheet at $1,800,000. However, there is, in addition, an unrecorded trade name valued at $300,000. The trade name has an indefinite useful life. Required: What amount of goodwill will be recorded? What will be the effect of the goodwill and trade name on the annual income statement? Now assume that the agreement between the investor and investee calls for an additional payment of $600,000 contingent upon the investee reaching a certain level of income within three years. You estimate the fair value of the potential payment at $300,000. What effect, if any, does the potential payment have on the amount of goodwill recognized?Explanation / Answer
Solution :
a. Goodwill computation
b.Since Goodwill is an ntangible asset , there will be no effect of goodwill on the income statement.Also trade name is assumed to be having infinite life , which also gives it nature of intangible asset, hence no eefect on income statement.
c.If fair value of contingent payment is $300000 , then it is an addition to purchase consideration.This wll be added to cost of acquistion
Current cost of acquisition - $3000000
Fair value of contngent payment - $ 300000
Total Cost of acquistion - $3300000
Less : Fair value of Net assets - $1800000
Hence Goodwill = $1500000
Hence , if potential goodwill will increase by $ 300000
Cost of acquistion $ 3000000 Fair value of Net assets $1800000 Goodwill $1200000 Allocation of Goodwill Unrecorded Trade name $300000 Goodwill $900000