5. (TCO C) Floyd Company purchases Haeger Company for $800,000 cash on January 1

Question

5. (TCO C) Floyd Company purchases Haeger Company for $800,000 cash on January 1, 2011. The book value of Haeger Company’s net assets, as reflected on its December 31, 2010 balance sheet, is $620,000. An analysis by Floyd on December 31, 2010 indicates that the fair value of Haeger’s tangible assets exceeded the book value by $60,000, and the fair value of identifiable intangible assets exceeded book value by $45,000. How much goodwill should be recognized by Floyd Company when recording the purchase of Haeger Company? (Points : 5) $0 $180,000 $120,000 $75,000

Explanation / Answer

When recoding the purchase of the company transferee company should record goodwill using the following formula:

Purchase consideration

Less: Fair Value of Assets taken over i.e. (Book value + Excess of fair value over book value)

However, while calculating goodwill, intangible assets are taken over at their book value only.

So goodwill in this case shall be recorded on the below value.

Purchase consideration $ 800,000

Less: Book value of assets taken over $ 620,000

Less: Excess of fair value ove book value of tangible assets $ 60,000

Goodwill $ 120,000

Note: Excess fair value of intangible assets over book value, shall not be taken into account while calculating goodwill.

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