Question

Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet's net assets was determined to be $510,000 on that date.

Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Zenith paid $500,000 for the acquisition?
A) $0
B) $50,000
C) $150,000
D) $40,000

Answer 1

Goodwill is calculated by subtracting the fair value of the net assets acquired from the purchase price. Since the fair value of Plummet's net assets is greater than the purchase price, there is no goodwill, and the answer is $0.

Step-by-step explanation:

The amount of goodwill to be reported in the consolidated financial statements following the combination of Zenith Corporation and Plummet Corporation can be calculated as follows:

• First, identify the purchase price of the acquisition, which is $500,000.
• Next, assess the fair value of Plummet Corporation's net assets at the time of acquisition, which amounts to $510,000.
• Finally, goodwill is calculated by subtracting the fair value of the net assets acquired from the purchase price. In this case, it would be $500,000 - $510,000.

Since the purchase price is less than the fair value of the net assets, the calculated amount would be negative. This indicates that there is no goodwill created from this transaction. Consequently, the goodwill reported will be $0.

Correct answer: A) $0