Relation between Purchase Price, Goodwill, and Negative Goodwill
The following balance sheets were reported on January 1, 2011, for Peach Company and Stream Company:
|
Peach |
&ream |
|
|
Cash |
$ 100,000 |
$ 20,000 |
|
Inventory |
300,000 |
100,000 |
|
Equipment (net) |
880,000 |
380,000 |
|
Total |
$1,280,000 |
$500,000 |
|
Total Liabilities |
$ 300,000 |
$100,000 |
|
Common stock, $20 par value |
400,000 |
200,000 |
|
Other contributed capital |
250,000 |
70,000 |
|
Retained earnings |
330,000 |
130,000 |
|
Total |
$1,280,000 |
$500,000 |
Required:
Appraisals reveal that the inventory has a fair value of $120,000, and the equipment has a current value of $410,000. The book value and fair value of liabilities are the same. Assuming that Peach Company wishes to acquire Stream for cash in an asset acquisition, determine the following cutoff amounts:
- The purchase price above which Peach would record goodwill.
- The purchase price below which the equipment would be recorded at less than its fair market value.
- The purchase price below which Peach would record a gain.
- The purchase price below which Peach would obtain a “bargain.”
- The purchase price at which Peach would record $50,000 of goodwill.