At year-end, Loyola Corporation acquired a 100% ownership interest in Berwyn Cor

Question

At year-end, Loyola Corporation acquired a 100% ownership interest in Berwyn Corporation at a cost of $500,000 cash. Loyola determined that Berwyn’s inventory was undervalued by $25,000 on the acquisition date. Loyola had retained earnings totaling $215,000, common stock totaling $60,000, total assets of $600,000, and total liabilities of $325,000 just prior to the consolidation. Berwyn’s net assets had a book value of $287,500 at the time of acquisition, with $87,500 reported as common stock and $200,000 reported as retained earnings. How much will Loyola report as goodwill on its consolidated Balance Sheet immediately after the acquisition?

Explanation / Answer

Purchase consideration paid by Loyola = $500,000

Book value of Berwyn's net assets = $287,500

Berwyn's inventory was undervalued by $25,000 on the aquisition date.

Hence, net assets aquired = 287,500 + 25,000

= $312,500

Hence, Loyola will report as goodwill in its cosolidated balance sheet = Purchase consideration - Net assets

= 500,000 - 312,500

= $187,500

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