Fresh Cut Corporation purchased all the outstanding common stock of Premium Meat

Question

Fresh Cut Corporation purchased all the outstanding common stock of Premium Meats for $12,600,000 in cash. The book value of Premium Meats' net assets (assets minus liabilities) was $7,958,000. The book values and fair values of Premium Meats' assets and liabilities were:

Book Value Fair Value

Receivables $ 1,400,000 $ 1,300,000

Property, plant, and equipment 8,000,000 9,400,000

Intangible assets 208,000 1,200,000

Liabilities (1,650,000) (2,000,000)

Net assets $ 7,958,000 $ 9,900,000

Calculate the amount Fresh Cut paid for goodwill?

Explanation / Answer

Goodwill is the amount you pay over the fair value of the company's assets. So, we paid $12,600,000 for the company. The fair value of the assets is $1.3m + $9.4m + $1.2m - $2.0m = $9,900,000. Goodwill = $12,600,000 - $9,900,000 = $2,700,000. Just ignore the book value. It's meant to confuse you -- a lot of people get confused on whether goodwill is value over net assets or over fair assets. It is the latter.

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