Caldwell Inc. acquired 65% of Club Corp. for $2,600,000. Club owned a building a

Question

Caldwell Inc. acquired 65% of Club Corp. for $2,600,000. Club owned a building and equipment with ten-year useful lives. The book value of these assets was $830,000, and the fair value was $950,000. For Club's other assets and liabilities, book value was equal to fair value. The total fair value of Club's net assets was $3,500,000.

Required: Using the acquisition method, determine the amount of goodwill associated with Caldwell's purchase of Club.

Caldwell Inc. acquired 65% of Club Corp. for $2,600,000. Club owned a building and equipment with ten-year useful lives. The book value of these assets was $830,000, and the fair value was $950,000. For Club's other assets and liabilities, book value was equal to fair value. The total fair value of Club's net assets was $3,500,000.

Required: Determine the amount of the non-controlling interest as of the date of the acquisition.

Explanation / Answer

The non-controlling interest is the portion of the firm not purchased.

That is 100% - 65% = 35%.

Total is 2,600,000 / .65 = $4,000,000 x 35% = 1,400,000.

The first step for figuring out goodwill is to figure out what the fair value of Club Corp is. That is, if $2,600,000 = 65% of Club Corp., what is 100% of Club Corp.?

You do this by dividing the $2,600,000 by the percent and solving for the 100%, in this case $4,000,000.
Fair value of Club Corp. implied by purchase price of 65%:

2,600,000 / .65 = $4,000,000

Then, compare the fair value of the individual assets of Club Corp to the 100% consideration (purchase price if bought the whole thing) and find goodwill.

Fair value of net assets = $3,500,000

Goodwill: $4,000,000 - $3,500,000 = $500,000

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