Question

Patton has acquired several other companies. Assume that Patton purchased Kate for $ 9 comma 000 comma 000 cash. The book value of Kate's assets is $ 18 comma 000 comma 000 ​(market value, $ 20 comma 000 comma 000​), and it has liabilities of $ 14 comma 000 comma 000 ​(market value, $ 14 comma 000 comma 000​). Requirements 1. Compute the cost of goodwill purchased by Patton. 2. Record the purchase of Kate by Patton. Requirement 1. Compute the cost of goodwill purchased by Patton. Purchase price to acquire Kate Market value of Kate's assets Less: Market value of Kate's liabilities Less: Market value of Kate's net assets Goodwill

Answer 1

Answer:

1. Compute the cost of goodwill purchased by Patton.

goodwill = acquisition price - FMV (assets - liabilities)

acquisition price = $9,000,000

FMV assets = $20,000,000

FMV liabilities = $14,000,000

Goodwill = $9,000,000 - ($20,000,000 - $14,000,000) = $9,000,000 - $6,000,000 = $3,000,000

2. Record the purchase of Kate by Patton.

Dr Kate Co. 6,000,000

Dr Goodwill 3,000,000

    Cr Cash 9,000,000