Question

Johnson Corporation purchased all of the outstanding common stock of Smith Corporation for $11,000,000 in cash. The book value of Smith’s net assets (assets minus liabilities) was $7,800,000. The fair values of all of Smith’s assets and liabilities were equal to their book values with the following exceptions:
Book Value Fair Value
Receivables $1,300,000 $ 1,100,000
Property, plant, and equipment 8,000,000 9,400,000
Intangible assets 200,000 1,200,000
Required:
Calculate the amount paid for goodwill

Answer 1

Answer:

$5,400,000

Explanation:

Amount paid for goodwill:

= Purchase Consideration - Fair value of net assets + Fair value in excess of book value - Book value in excess of fair value

= $11,000,000 - (Book value of net assets) + (Property, plant, & equipment + Intangible assets) - (Receivables)

= $11,000,000 - $7,800,000 + ($1,400,000 + $1,000,000) - $200,000

= $11,000,000 - $7,800,000 + $2,400,000 - $200,000

= $5,400,000