Joyful Sound Music Company purchased the net assets (i. e.,assets minus liabilit

Question

Joyful Sound Music Company purchased the net assets (i. e.,assets minus liabilities) of Metrodome Company for $ 845,000.Metrodome is a retailer of music, instruments, and related items.Its net assets have been carried on its own books at a total of $530,000. An appraisal of all of Metrodomes assets and liabilitiesrevealed a net fair market value of $ 783,000. Joyful is willing topay extra because of Metrodomes very loyal retail customers, mostof whom have dealt exclusively with the company for more than 30years. (a) What is the amount of goodwill that Joyful should recordat acquisition of Metrodome? (b) What might cause the purchasedgoodwill in this situation to become impaired?

Explanation / Answer

A. The Initial valuation of goodwill is:the excess of the purchase price over the fair value of the assetsacquired. Purchase Price $845,000 Fair market value $783,000 Goodwill $62,000 Joyful should record $62,000 amount ofgoodwill at the time of acquisition. B. Impairment occurred when Fair value isless than the carrying value. here in theis situation NOIMPAIRMENT is recognized because Fair value is greater than Carryingvalue.

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