Question

New Harvest Bakery acquired all the outstanding common stock of Red Rock Bakery for $70,300 in cash. The book values and market values of Red Rock's assets and liabilities were as follows:
Book Value Fair Value
Current assets $22,500 $22,800
Property, plant, and equipment 40,100 52,100
Other assets 4,800 5,400
Current liabilities 10,600 15,100
Long-term liabilities 22,400 20,900


Calculate the amount paid for goodwill.

Answer 1

Answer: $26,000

Explanation:

Given that,

Acquired all the outstanding common stock (in cash) =  $70,300

Market value is also known as fair value.

Fair values of Red Rock's assets and liabilities:

Current assets = $22,800

Property, plant, and equipment = $52,100

Other assets = $5,400

Current liabilities = $15,100

Long-term liabilities = $20,900

Total = Current assets + Property, plant, and equipment + Other assets - Current liabilities - Long-term liabilities

        = $22,800 + $52,100 + $5,400 - $15,100 - $20,900

        = $44,300

Amount paid = $70,300

Therefore,

Amount paid for goodwill = Amount paid - Total

                                          = $70,300 - $44,300

                                          = $26,000