Question

Backstreets Co. recently acquired all of Jungleland, Inc.'s net assets in a business acquisition. The cash purchase price was $7.7 million. Jungleland, Inc.'s assets and liabilities had the following appraised values immediately prior to the acquisition:
land, $2.0 million
buildings, $3.7 million
inventory, $2.5 million
long-term notes payable, for which Backstreets Co. assumes payment responsibilities, $1.8 million.
Required:

1. How much goodwill will result from this transaction?

Answer 1

Answer:

The goodwill that resulted from the transaction is $1.3 million, the excess paid by Backstreets Co. over the net assets of Jungleland Inc. acquired

Explanation:

Goodwill is the excess of purchase consideration over net assets acquired in a business combination.

The total net assets acquired can be deduced as total assets less total liabilities:

Land                       $2m

Buildings                $3.7m

Inventory                $2.5m

total assets               8.2m

Liabilities                  ($1.8m)

Net Assets                 $6.4 m

Purchase price           $7.7 m

Goodwill is $1.3m ($7.7m -$6.4m)

The goodwill is the advantage that the owners business have over the new owners being the pioneers that set the business on the right path