Question

On January 1, 2019. Pop Co. acquired 75% of the outstanding common shares of Soda Inc. for $161.250 cash. On that date, Soda had common shares of $156.250 and retained earnings of $31.250. At acquisition, the Identifiable assets and liabilities of Soda had fair values that were equal to carrying amounts except for inventory, which had fair value $8.000 greater than carrying amount and plant and equipment, which had fair values $10,000 greater than carrying amounts. The plant and equipment had a remaining useful life of 5 years on January 1, 2019. Any goodwill will be tested yearly for Impairment. Balance sheets as at December 31, 2019 are presented below. Cash Accounts receivable Inventory Land Plant & Equipment, net Investment in Soda Inc. - equity Pop Co. $ 10, eee 38,750 75,250 50,880 150, eee 168,5ee $492,500 $ 45, 5ee Soda Inc. $ 5,888 42,250 62,500 100,000 175,080 Current liabilities Bonds payable Common shares Retained earnings $ 384,750 $ 47,125 128, 125 156,250 53,25e $ 384,750 338,888 109, eee $492,500 For 2019. Soda Inc. reported net Income of $37.000 and paid dividends of $15.000. Pop Co. reported net Income for 2019 of $50.000 and paid dividends of $25,000 An Impalment test on goodwill conducted on December 31, 2019. Indicated that a $500 loss had occurred. What was the amount of goodwill that arose on the acquisition of Soda's common shares on January 1, 2019? Multiple Choice (59,250) $7125 $27.500 $9.500

Answer 1

The amount of goodwill that arose on the acquisition of Soda's common shares on January 1, 2019 is $27,500.

To calculate this, we need to first determine the purchase price allocation.

Purchase price = $161,250
Fair value of identifiable net assets:
- Cash = $5,888
- Accounts receivable = $42,250
- Inventory = $70,500 ($62,500 + $8,000)
- Land = $100,000
- Plant and equipment, net = $185,080 ($175,080 + $10,000)
Total fair value of identifiable net assets = $404,718

Purchase price in excess of fair value of identifiable net assets = $161,250 - $404,718 = $(-243,468)
Since the purchase price is greater than the fair value of identifiable net assets, this indicates that there is negative goodwill.

However, negative goodwill cannot be recognized on the balance sheet. Instead, we allocate the excess purchase price to the fair value of the identifiable net assets. This results in a reduction in the fair value of identifiable net assets and creates goodwill.

Fair value of identifiable net assets = $404,718 - $(-243,468) = $648,186

Goodwill = Purchase price - Fair value of identifiable net assets
Goodwill = $161,250 - $648,186 = $(-486,936)

Again, negative goodwill cannot be recognized on the balance sheet. Therefore, the goodwill is zero.

However, since the question indicates that an impairment loss of $500 occurred, this implies that there was goodwill recorded. We can calculate the amount of goodwill by rearranging the above equation:

Goodwill = Purchase price - Fair value of identifiable net assets - Impairment loss
Goodwill = $161,250 - $648,186 - $500 = $(-487,436)

Again, negative goodwill cannot be recognized on the balance sheet, so we need to adjust the goodwill to zero.

Therefore, the amount of goodwill that arose on the acquisition of Soda's common shares on January 1, 2019 is $0.

None of the multiple choice answers are correct.