Answer:
D. record goodwill of $200,000 to be reviewed annually for impairment
Explanation:
Given:
The Granny Smith Company agreed to purchase the Red Delicious Company for $800,000.
At the date of purchase, Red Delicious had :
Current assets with a fair market value = $450,000
Non current assets with a fair market value = $750,000
Total liabilities = $600,000
Question asked:
In accounting for this transaction, Granny Smith should...............
Solution:
Here he Granny Smith Company is purchasing another company Red Delicious Company, we will have to determine the Goodwill owned by Granny Smith Company by using this formula:
Goodwill = ( C + NCI + FV ) − NA
C = Consideration transferred
NCI = Amount of non-controlling interest
FV = Fair value of previous equity interests
NA = Net identifiable assets
Net identifiable assets = Total assets - total liabilities
Total assets = current assets + non current assets
= $450,000 + $750,000 = $1200,000
Net identifiable assets = Total assets - total liabilities
= $1200,000 - $600,000 = $600,000
Goodwill = ( C + NCI + FV ) − NA
= ($800000 + 0 + 0) - $600,000
= $800000 - $600,000 = $200,000
Hence, option D is correct, record goodwill of $200,000 to be reviewed annually for impairment.
