ExpertHard1 markMultiple Choice
CPA · Question 24 · Area 3: Technical Accounting and Reporting
Company A acquires Company B. Company A pays $1,000,000 cash. <br/>Company B's Net Identifiable Assets have a Book Value of $600,000 and a Fair Value of $800,000. <br/>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.<br/><br/>What amount of Goodwill should be recorded?
Company A acquires Company B. Company A pays $1,000,000 cash. <br/>Company B's Net Identifiable Assets have a Book Value of $600,000 and a Fair Value of $800,000. <br/>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.<br/><br/>What amount of Goodwill should be recorded?
Answer options:
A.
$200,000
B.
$400,000
C.
$300,000
D.
$500,000
How to approach this question
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.
Full Answer
C.$300,000✓ Correct
Total Consideration = $1,000,000 (Cash) + $100,000 (FV of Contingency) = $1,100,000. Net Assets FV = $800,000. Goodwill = $1,100,000 - $800,000 = $300,000.
Common mistakes
Using Book Value of assets; ignoring contingent consideration; using the face value of contingency instead of fair value.
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