Question

4. Suppose an acquiring firm pays $100 million for a target firm and the target's assets have a book value of $70 million and an estimated replacement value of $80 million. What amount would be allocated to the acquiring firm's goodwill account?

Answer 1

Answer:

The question is missing below options:

A. $0 million B. $20 million C. $30 million D. $70 million E. $80 million

The correct option is B,$20 million

Explanation:

Goodwill =Purchase consideration less fair value of net assets acquired

Purchase consideration is $100 million

Fair value of net assets is $80 million, the replacement value

Goodwill=$100 million -$80 million

Goodwill=$20 million

Provided the replacement value was not given, the book value of $70 million would have been a proxy for the fair value,hence giving a goodwill of $30 million($100 million less $70 million)

Option D is wrong because goodwill is not the same as book value of assets

Option E is wrong because the replacement value of asset is goodwill.