Giannacarro, Inc., purchased 100% of the common shares of Arietta for $290,000 o

Question

Giannacarro, Inc., purchased 100% of the common shares of Arietta for $290,000 on January 1, 20X7. Arietta's balance sheet just before the acquisition was as follows ($ in thousands): $ 90 220 $310 $240 70 $310 Cash Net fixed assets Total assets Liabilities Stockholders' equity Total liabilities and stockholders' equity The fair market values of Arietta's assets and liabilities were equal to their book values. 1. Compute the amount of goodwill Giannacarro would recognize on this purchase. Where would this goodwill appear on Giannacarro's financial statements? 2. Giannacarro's 20X7 net income from all operations excluding those of Arietta was $100,000. Arietta had a net loss of $5,000. Assume there were no intercompany transactions. Compute consolidated net income for 20X7. 3. Repeat requirement 2 assuming Giannacarro concluded goodwill was impaired by $20,000. 4. How much goodwill appears on the consolidated balance sheet after requirement 3?

Explanation / Answer

1.

Price paid for acquisition = $290,000

Net assets of Arietta (310,000 - 240,000) = $ 70,000

Goodwill on acquisition =$220,000

2.

Net income of Giannacarro for 20X7 = $100,000

(Net loss) of Arietta for 20X7 = - $5,000

Consolidated net income for 20X7 = $95,000

3.

Net income of Giannacarro for 20X7 = $100,000

(Net loss) of Arietta for 20X7 = - $5,000

Goodwill inmapirment = -$20,000

Consolidated net income for 20X7 = $75,000

4. Goodwill will appear at $200,000

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