Q9-26E - Horngren'S Financial And Managerial Accounting

Question

Measuring and recording goodwill 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 the goodwill purchased by Princeton.

 2. Record the purchase of Kelleher by Princeton

Step-by-Step Solution

Answer

Answer

The Value of Goodwill is $1,000,000.

Step 1: Meaning of Business Combination

The process under which the business unit acquires the net assets of any other business entity against the consideration decided upon is known as a business combination. 

Step 2: Calculate the cost of the Goodwill purchased by Princeton.

Particulars	Amount $	Amount $
Purchase price to acquire		$9, 000,000
Less:
Market value of asset	$20,000,000
Less : Market value of liabilities	(12, 000,000)	(8,000,000)
Goodwill		$1,000,000

Step 3: Journal entry in the book of Kelleher by Princeton

Date	Particulars	Debit ($)	Credit ($)
	Assets	20,000,000
	Goodwill	1,000,000
	To Liabilities		12,000,000
	To Cash		9,000,000
	( To record the acquisition of Kelleher)