Compute Goodwill Purchased and Record Purchase of Kelleher by Princeton
Princeton Acquires Kelleher
Princeton has acquired several other companies. Assume that Princeton purchased Kelleher for $9,000,000 cash. The book value of Kelleher's assets is $19,000,000 (market value, $20,000,000), and it has liabilities of $12,000,000 (market value, $12,000,000).
Requirements
1. Compute the cost of goodwill purchased by Princeton. 2. Record the purchase of Kelleher by Princeton.Requirement 1. Compute the cost of goodwill purchased by Princeton.
Answer:
1. $1,000,000
2. Debit Investment in Kelleher $9,000,000
Credit Cash $9,000,000
Explanation:
1. Goodwill is the excess of purchase consideration over the net asset of the entity acquired. Goodwill is the excess of the amount paid to acquire a company over the book value of the company's assets and liabilities. The net assets of Kelleher can be determined as follows;
Net assets = Assets - Liabilities
Since the market value of Kelleher's assets is $1,000,000 ($20,000,000 - 19,000,000) more than the book value and the liabilities are the same (market and book values),
Net asset = $20,000,000 - $12,000,000
= $8,000,000
Therefore,
Goodwill = Purchase consideration - Net asset
= $9,000,000 - $8,000,000
= $1,000,000
2. Where the acquisition was done through cash, the entries to be posted by Princeton would be to debit Investments in Kelleher as an asset acquired by Princeton and credit Cash as there will be a reduction in cash on the acquisition of Kelleher by Princeton. The debit and credit amounts are $9,000,000.