Question 15.3: Assume that the hypothetical Blake Co. acquires 30 percent o...

International Financial Statement Analysis

Assume that the hypothetical Blake Co. acquires 30 percent of the outstanding shares of the hypothetical Brown Co. At the acquisition date, book values and fair values of Brown’s recorded assets and liabilities are as follows:

Blake Co. believes the value of Brown Co. is higher than the fair value of the identifiable net assets. They offer $100,000 for a 30 percent interest in Brown Co. Part of the excess purchase price is attributable to the $50,000 difference between book value and fair value of the identifiable assets and part of the excess is attributable to goodwill. Calculate goodwill.

	Book Value	Fair Value
Current assets	$10,000	$10,000
Plant and equipment	$190,000	$220,000
Land	$\underline{\$120,000}$	$\underline{\$140,000}$
	$320,000	$370,000
Liabilities	$\underline{\$100,000}$	$\underline{\$100,000}$
Net assets	$220,000	$270,000

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As illustrated above, goodwill is the residual excess not allocated to identifiable assets or liabilities.

Purchase price	$100,000
30 percent of book value of Brown	$\underline{\$66,000}$
(30% × $220,000) Excess purchase price	$\underline{\underline{\$34,000}}$
Attributable to net assets Plant and equipment (30% × $30,000)	$9,000
Land (30% × $20,000)	$6,000
Goodwill (residual)	$\underline{\$19,000}$
	$\underline{\underline{\$34,000}}$

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