Chapter 8, Problem 8.9P

Computing Goodwill from the Purchase of a Business and Related Depreciation and Amortization

LO8-3, 8-6 The notes to a recent annual report from Weebok Corporation indicated that the company acquired another company, Sport Shoes, Inc.

Assume that Weebok acquired Sport Shoes on January 5 of the current year. Weebok acquired the name of the company and all of its assets for $750,000 cash. Weebok did not assume the liabilities. The transaction was closed on January 5 of the current year, at which time the balance sheet of Sport Shoes reflected the following book values and an independent appraiser estimated the following market values for the assets:

Sport Shoes, Inc.
January 5 of the Current Year	Book Value	Market Value*
Accounts receivable (net)	$ 50,000	$ 50,000
Inventory	385,000	350,000
Fixed assets (net)	156,000	208,000
Other assets	4,000	10,000
Total assets	$595,000
Liabilities	$ 75,000
Stockholders’ equity	520,000
Total liabilities and stockholders’ equity	$595,000

*These values for the purchased assets were provided to Weebok by an independent appraiser.

Required:

1. 1. Compute the amount of goodwill resulting from the purchase. (Hint: Assets are purchased at market value in conformity with the cost principle.)
2. 2. Compute the adjustments that Weebok would make at the end of the current year (ending December 31) for the following:
   1. a. Depreciation of the fixed assets (straight line), assuming an estimated remaining useful life of 10 years and no residual value.
   2. b. Goodwill (an intangible asset with an indefinite life).