On 1 March 2017, Brook Ltd acquired all the assets and liabilities of Moriarty L

Question

On 1 March 2017, Brook Ltd acquired all the assets and liabilities of Moriarty Ltd for $230,000 cash. The cost of undertaking a due diligence was $3,000, paid on 1 April 2017. The due diligence process revealed that Moriaty Ltd was being sued by a former client seeking compensation of $21,000. The lawyers estimated that Moriaty Ltd faced a 25% chance of losing the lawsuit. At that date, Moriarty Ltd's recorded assets and liabilities were as follows: Book Value 20,000 42,000 106,000 100,000 6,000 12,000 50,000 Fair Value 18,000 40,000 110,000 133,500 6,000 12,000 50,000 Assets & Liabilities of Moriarty Ltd Accounts Receivable Inventor Plant and Equipment (net of depreciation Land Accounts Payable Short-Term Borrowings Bank Loan The company tax rate is 30%.

Explanation / Answer

The Answer is $1,750 Goodwill

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Accounts Receivable $        18,000 Inventory $        40,000 Plant & Equipment $     110,000 Land $     133,500 Accounts Payable $        (6,000) Short-term-Borrowings $     (12,000) Bank Loan $     (50,000) Expected Liability(21000*25%) $        (5,250) Net Assets $     228,250 Cash Paid $     230,000 Goodwill(230000-228000) $          1,750

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