Valuation and Amortization of Goodwill
a. In the takeover battle between Viacom and QVC over Paramount, the potential cost of acquiring Paramount varied between $8 and $11.5 billion. How do you suppose a potential buyer (Viacom) would determine how much to pay in order to acquire another firm (Paramount)? To what extent would the assets and liabilities reported in Paramount’s balance sheet influence the amounts offered for Paramount’s ownership shares?
b. Assume that Viacom purchases Paramount for $11 billion and that the recorded value of Paramount’s net assets at that date is $6.5 billion. For purposes of subsequent financial reports, how would Viacom account for the difference of $4.5 billion ($11 billion_$6.5 billion)? How would this difference affect the balance sheets and the income statements of Viacom in subsequent years?