AB Inc, acquired 100% stake in CD Inc. on January 1, 2013. AB paid $564,000 cash for the acquisition. On that date, the book value of the net assets of CD was $360,000. However, these net assets were overvalued by $100,000. How much goodwill to be recognized in relation to this acquisition?

AB Inc, acquired 100% stake in CD Inc. on January 1, 2013. AB paid $564,000 cash for the acquisition. On that date, the book value of the net assets of CD was $360,000. However, these net assets were overvalued by $100,000. How much goodwill to be recognized in relation to this acquisition?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Consolidation

Consolidation in general examination implies an asset oscillating between well-defined methods of trading status. Consolidation is commonly known as market indecisiveness, which completes when the asset's values move forward or backward the trading structure.

Question

AB Inc, acquired 100% stake in CD
Inc. on January 1, 2013. AB paid
$564,000 cash for the acquisition. On
that date, the book value of the net
assets of CD was $360,000. However,
these net assets were overvalued by
$100,000. How much goodwill to be
recognized in relation to this
acquisition?
Select one:
O a. $404,000
b. $304,000
c. $104,000
O d. $204,000

Expert Solution

Step 1

Goodwill is the excess value paid by the acquirer over the fair value of net assets to acquire the company.

Fair value of net assets = Book Value - Overvalued

= $360,000 - $100,000

= $260,000

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