Styles Goodwill Mills Company is considering purchasing EKC Company. EKC\'s bala
ID: 2561096 • Letter: S
Question
Styles Goodwill Mills Company is considering purchasing EKC Company. EKC's balance sheet at December 31, 2016, as follows: $53,000 Current liabilities $63,000 230,000 250,000 6,000 Bonds payable unts receivable Inventory 12 0,000 Common stock Property plant, and squipment (net)650,000 tained earnings346,000 650,000 Retained earnings $889,000 $889,000 At December 31, 2016, Mills discovered the following about EKC: No allowance for uncollectible accounts has been established. An allowance of $4,500 is considered appropriate. a. b. The LIFO inventory method has been used. The FIFO inventory method would be used if EKC were urchased by Mills. The FIFo inventory valuation of the December 31, 2016, ending inventory would be $180,000. c. The fair value of the property, plant, and equipment (net) is $780,000. d. The company has an unrecorded patent that is worth $100,000 The book values of the current liabilities and bonds payable are the same as their market values. Required: 1. Compute the value of the goodwill if Mills pays $1.376.500 for EKC. e.Explanation / Answer
Value of goodwill = Purchase consideration - Fair value of Net assets purchased
Fair value of Net Assets = Fair value of Total assets - Fair value of Total outside liabilities
Fair valur of Total assets = Cash + (Accounts receivable - Allowance for uncollectible accounts) + Inventory + Property, plant and equipment = 53,000 + (66,000 - 4,500) + 180,000 + 780,000 = $1,074,500
Fair value of total outside liabilities = Current liabilities + Bonds payable = 63,000 + 230,000 = $293,000
Fair value of net assets = 1,074,500 - 293,000 = $781,500
Value of goodwill = 1,376,500 - 781,500 = $595,000