Big Company purchases Small Company for $1,600,000 cash on January 1, 2017. The

Question

Big Company purchases Small Company for $1,600,000 cash on January 1, 2017. The book value of Small Company's net assets, as reflected on its December 31, 2016 balance sheet is $1,240,000. An analysis by a valuation consultant on December 31st, 2016 indicates that the fair value of Small Company's net assets exceeded the book value by $210,000.  

How much goodwill should be recognized by Big Company due to the purchase of Small Company?

True or false: General Products Company should recognize $300,000 in goodwill impairment losses in 2016.

Explanation / Answer

PART - 1

Big Company purchases Small Company for $1,600,000

Book value of Net assets in Balancesheet of small company =  $1,240,000

Fair value of Small Company's net assets exceeded the book value by $210,000

So, Fair Value of Net Assests of Small Company = $1,240,000 + $210,000 = $1,450,000

So, Goodwill = $1,600,000 - $1,450,000 = $150,000 (Ans)

PART -2

False.
Company was taken over on 1st Jan 2017. So, there will be no impairment losses in 2016.

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