Question

You purchase another company for $50m. The company you purchase has assets with a fair value of $75m and liabilities with a fair value of $30m. The amount of goodwill you would record in this transaction is:a. $45m b. $5m c. $50m d. $75m

Answer 1

Answer:

b. $5m

Explanation:

If we purchase another company for $50m and the company you purchase has assets with a fair value of $75m and liabilities with a fair value of $30m. The amount of goodwill we should record in this transaction is: $5m

Goodwill upon acquisition of companies is derived by subtracting the fair value of NET ASSETS from the TOTAL CONSIDERATION (i.e the price paid to acquire the company)

In the scenario, the value of Net Assets is the value of the fairvalue of the assets less the fair value of the liabilities which is $75 - $30 = $45

While the Total Consideration = $50

Therefore Goodwill = $50m - $45m = $5m