Assume that one of your clients asks for your assistance in allocating the $4,500,000 cost of a 100% acquisition of a competitor firm. You estimate the fair value of the net assets on the investee's balance sheet at $3,000,000. However, there is, in addition, an unrecorded trademark valued at $850,000. The intangible asset has an indefinite useful life. Required: a. What amount of goodwill will be recorded? b. What will be the effect of the goodwill and brand name on the annual income statement? c. Now assume that the agreement between the investor and investee calls for an additional payment of $500,000 contingent upon the investee reaching a certain level of income within three years. You estimate the fair value of the potential payment at $400,000. What effect, if any, does the potential payment have on the amount of goodwill recognized?
2-Assume that one of your clients asks for your assistance in allocating the $4,500,000 cost of a 100% acquisition of a competitor firm. You estimate the fair value of the net assets on the investee's
Required:
a. What amount of
b. What will be the effect of the goodwill and brand name on the annual income statement?
c. Now assume that the agreement between the investor and investee calls for an additional payment of $500,000 contingent upon the investee reaching a certain level of income within three years. You estimate the fair value of the potential payment at $400,000. What effect, if any, does the potential payment have on the amount of goodwill recognized?
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