Answer to Question #163549 in Accounting for Willy

Question

Casanova Company purchased another entity for P5,000,000 cash. The following carrying amount and fair value were associated with this acquisition:

Carrying amount Fair value

Accounts receivable 2,000,000 2,000,000

Inventory 1,000,000 500,000

Government contact 0 1,000,000

Equipment 400,000 500,000

Short-term loan payable (2,000,000) (2,000,000)

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Net assets 1,400,000 2,000,000

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The fair value associated with the government contract of the acquiree is not based on any legal or contractual relationship. In addition, for obvious reason, there is no open market trading for an intangible asset of this sort.

What is the goodwill arising from the acquisition?

a. 3,000,000

b. 3,600,000

c. 4,000,000

d. 0

Answer 1

The goodwill arises from the excess of amount paid as compared to the fair value of the net assets. To obtain goodwill, we subtract the fair value of net assets from the total cost of acquisition.

Fair value of net assets = P2,000,000

Acquisition cost = P5,000,000

Goodwill= P(5,000,000-2,000,000)

=P3,000,000