Sienna Company developed a specialized banking application software program that it licenses to various financial institutions through multiple-year agreements. On January 1, 2021, these licensing agreements have a fair value of $905,000 and represent Sienna's sole asset. Although Sienna currently has no liabilities, the company has a $188,000 net operating loss (NOL) carry-forward because of recent operating losses. On January 1, 2021, Paoli, Inc., acquired all of Sienna's voting stock for $1,130,000. Paoli expects to extract operating synergies by integrating Sienna's software into its own products. Paoli also hopes that Sienna will be able to receive a future tax reduction from its NOL. Assume an applicable federal income tax rate of 21 percent. a. If there is a greater than 50 percent chance that the subsidiary will be able to utilize the NOL carry-forward, how much goodwill should Paoli recognize from the acquisition? b. If there is a less than 50 percent chance that the subsidiary will be able to utilize the NOL carry-forward, how much goodwill should Paoli recognize from the acquisition?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Sienna Company developed a specialized banking application software program that it licenses to various financial
institutions through multiple-year agreements. On January 1, 2021, these licensing agreements have a fair value of
$905,000 and represent Sienna's sole asset. Although Sienna currently has no liabilities, the company has a
$188,000 net operating loss (NOL) carry-forward because of recent operating losses.
On January 1, 2021, Paoli, Inc., acquired all of Sienna's voting stock for $1,130,000. Paoli expects to extract operating
synergies by integrating Sienna's software into its own products. Paoli also hopes that Sienna will be able to receive
a future tax reduction from its NOL. Assume an applicable federal income tax rate of 21 percent.
a. If there is a greater than 50 percent chance that the subsidiary will be able to utilize the NOL carry-forward, how
much goodwill should Paoli recognize from the acquisition?
b. If there is a less than 50 percent chance that the subsidiary will be able to utilize the NOL carry-forward, how
much goodwill should Paoli recognize from the acquisition?
Transcribed Image Text:Sienna Company developed a specialized banking application software program that it licenses to various financial institutions through multiple-year agreements. On January 1, 2021, these licensing agreements have a fair value of $905,000 and represent Sienna's sole asset. Although Sienna currently has no liabilities, the company has a $188,000 net operating loss (NOL) carry-forward because of recent operating losses. On January 1, 2021, Paoli, Inc., acquired all of Sienna's voting stock for $1,130,000. Paoli expects to extract operating synergies by integrating Sienna's software into its own products. Paoli also hopes that Sienna will be able to receive a future tax reduction from its NOL. Assume an applicable federal income tax rate of 21 percent. a. If there is a greater than 50 percent chance that the subsidiary will be able to utilize the NOL carry-forward, how much goodwill should Paoli recognize from the acquisition? b. If there is a less than 50 percent chance that the subsidiary will be able to utilize the NOL carry-forward, how much goodwill should Paoli recognize from the acquisition?
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