Firenze Company developed a specialized banking application software program tha
ID: 2470526 • Letter: F
Question
Firenze Company developed a specialized banking application software program that it licenses to various financial institutions through multiple-year agreements. On January 1, 2014, these licensing agreements have a fair value of $752,500 and represent Firenze’s sole asset. Although Firenze currently has no liabilities, the company has a $205,000 net operating loss (NOL) carryforward because of recent operating losses.
On January 1, 2014, Parma, Inc., acquired all of Firenze’s voting stock for $960,000. Parma expects to extract operating synergies by integrating Firenze’s software into its own products. Parma also hopes that Firenze will be able to receive a future tax reduction from its NOL. Assume an applicable federal income tax rate of 35 percent.
If there is a greater than 50 percent chance that the subsidiary will be able to utilize the NOL carryforward, how much goodwill should Parma recognize from the acquisition?
If there is a less than 50 percent chance that the subsidiary will be able to utilize the NOL carryforward, how much goodwill should Parma recognize from the acquisition?
Goodwill:
Firenze Company developed a specialized banking application software program that it licenses to various financial institutions through multiple-year agreements. On January 1, 2014, these licensing agreements have a fair value of $752,500 and represent Firenze’s sole asset. Although Firenze currently has no liabilities, the company has a $205,000 net operating loss (NOL) carryforward because of recent operating losses.
Explanation / Answer
Fair Value of assets 752500 purchasing price 960000 NOL 205000 Tax 35% deferred tax assets 205000*35% 71750 a DTA RECOGNISED Goodwill = 960000-752500-71750 135750 b DTA NOT RECOGNISED Goodwill = 960000-752500 207500
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