Goodwill Stillman Company is considering purchasing EKC Company. EKC\'s balance

Question

Goodwill

Stillman Company is considering purchasing EKC Company. EKC's balance sheet at December 31, 2016, is as follows:

At December 31, 2016, Stillman discovered the following about EKC:

No allowance for uncollectible accounts has been established. An allowance of $4,500 is considered appropriate.

The LIFO inventory method has been used. The FIFO inventory method would be used if EKC were purchased by Stillman. The FIFO inventory valuation of the December 31, 2016, ending inventory would be $199,000.

The fair value of the property, plant, and equipment (net) is $720,000.

The company has an unrecorded patent that is worth $100,000.

The book values of the current liabilities and bonds payable are the same as their market values.

Required:

1. Compute the value of the goodwill if Stillman pays $1,265,500 for EKC.

$

2. Why would the book value of a company's identifiable net assets differ from its market value?

Cash $54,000 Current liabilities $56,000 Accounts receivable 71,000 Bonds payable 243,000 Inventory 130,000 Common stock 250,000 Property, plant, and equipment (net) 620,000 Retained earnings 326,000 $875,000 $875,000

Explanation / Answer

Stillman Company Requirement 1 Computation of value of goodwill Net assets taken over Amount Cash 54000 Accounts receivable 66500 Inventory 199000 Property, Plant and equipment 720000 Unrecorded patent 100000 Total asset 1139500 Less Current liabilities 56000 Bonds payable 243000 299000 Net assets taken over 840500 Stillman pays 1265500 Goodwill 425000 Requirement 2 There are various reason for book value of company's identifiable net asset differ from its market value Some of them are as follows 1 Identifiable net asset like property, plant and equipment are generally recorded at their historical cost which may be different from their market value. 2 Company may not have the policy of creating allowance for certain asset like Accounts receivable. 3 There might be different accounting policy followed for some asset like inventory, for example, instead of following FIFO or weighted average method, some company follows LIFO method and vice versa giving rise to book value differ from its market value 4 Some accounting policy may not allow the recognition of self generated intangible asset like patent and goodwill.

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