Calculating Goodwill in Business Acquisition
Understanding Goodwill in Business Acquisition
On June 30, 2014, Diode Inc. purchased for cash at $50 per share all 150,000 shares of outstanding common stock of Moore Company. Moore's balance sheet at June 30, 2014, showed net assets with a book value of $6,000,000. The fair value of Moore's property, plant, and equipment on June 30, 2014, was $800,000 in excess of its book value. What amount, if any, will be recorded by Diode as goodwill on the date of purchase?
Answer:
Goodwill = $700,000
Explanation:
The goodwill amounts to the excess of the "purchase consideration" (the money paid to purchase the asset or business) over the net value of the assets minus liabilities.
Purchase consideration = $50 X 150,000 = $7,500,000
Fair value of net assets = $6,000,000 (book value) + $800,000(fair value adjustment) = $6,800,000
Goodwill = $7,500,000 - $6,800,000 = $700,000
Question:
How is goodwill calculated in a business acquisition?
Answer:
Goodwill in a business acquisition is calculated as the difference between the purchase consideration and the fair value of the net assets acquired.