Question 1

Company A acquires Company B. Company A pays $1,000,000 cash.
Company B's Net Identifiable Assets have a Book Value of $600,000 and a Fair Value of $800,000.
The purchase agreement includes contingent consideration: Company A will pay an additional $200,000 if B meets certain targets. The fair value of this contingency at acquisition is estimated at $100,000.

What amount of Goodwill should be recorded?

Accepted Answer

Formula: Goodwill = (Cash Paid + FV of Contingent Consideration + FV of NCI) - FV of Identifiable Net Assets. Don't use Book Value of assets. Don't use the max payout of contingency, use its FV.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Using Book Value of assets; ignoring contingent consideration; using the face value of contingency instead of fair value.

How to approach this question

Full Answer

Common mistakes

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