The Goodwill Calculation in James Company's Acquisition of Smith Corporation
James Company acquires Smith Corporation for $10 million
James Company has recently acquired Smith Corporation for a total consideration of $10 million. This acquisition marks a significant milestone for both companies as they join forces to create a stronger presence in the market.
The Book Value vs. Fair Value of Smith Corporation's Net Assets
It is worth noting that the book value of Smith Corporation's net assets stands at $7 million, while the fair value of the same assets is estimated to be $9 million. This difference in valuation illustrates the disparity between historical cost (book value) and current market value (fair value).
Calculation of Goodwill in the Acquisition
Now, let's determine the goodwill associated with James Company's acquisition of Smith Corporation. Goodwill represents the intangible asset that arises when the purchase price of an acquired company exceeds the fair value of its net assets.
In this scenario, the goodwill can be calculated as follows:
- Purchase Price: $10 million
- Fair Value of Net Assets: $9 million
- Goodwill: Purchase Price - Fair Value of Net Assets
Final Answer:
The goodwill associated with James Company's acquisition of Smith Corporation is $1 million. This is calculated as the difference between the acquisition price ($10 million) and the fair value of the net assets ($9 million).
Explanation:
The calculation of goodwill involves comparing the purchase price with the fair value of net assets acquired. In this case:
$10 million (Purchase Price) - $9 million (Fair Value of Net Assets) = $1 million (Goodwill)
Therefore, the goodwill associated with the acquisition amounts to $1 million.
What is the goodwill associated with the acquisition?1) 0
2) $3 million
3) $1 million The goodwill associated with the acquisition is: - 1) 0 - 2) $3 million - 3) $1 million (Correct Answer)