Question

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 of $450,000, noncurrent assets (including no marketable securities) with a fair market value of $750,000, and liabilities of $600,000. In accounting for this transaction, Granny Smith should ________.A. record noncurrent assets at $800,000B. record a debit of $200,000 as a loss on the purchaseC. record current assets at $800,000D. record goodwill of $200,000 to be reviewed annually for impairment

Answer 1

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.