CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingMedium
A company acquired 80% of the voting stock of Subsidiary Co. on January 1, Year 1, for $500,000. On the acquisition date, Subsidiary Co. had identifiable net assets with a fair value of $600,000. The noncontrolling interest's share of Subsidiary Co.'s fair value was $120,000. What amount of goodwill should be recognized in the consolidated financial statements?
- A$60,000
- B$80,000
- C$20,000
- D$100,000
Show answer & explanationAnswer & explanation
Correct answer: C. $20,000
Goodwill is calculated as the excess of the consideration transferred (plus the fair value of the noncontrolling interest) over the fair value of identifiable net assets acquired. In this case, Goodwill = ($500,000 consideration transferred + $120,000 NCI) - $600,000 fair value of net assets = $620,000 - $600,000 = $20,000.
Why the other options are wrong
- A. This would be if only the parent's share of goodwill was recognized, which is not allowed under GAAP for full goodwill method.
- B. This might result from an incorrect calculation, perhaps misinterpreting the NCI value or net assets.
- D. This is incorrect; it might result from using only the parent's share of net assets or miscalculating the NCI.
Goodwill in Business Combinations
Goodwill is an intangible asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.
- Calculated as (Consideration Transferred + Fair Value of NCI) - Fair Value of Identifiable Net Assets.
- Not amortized, but tested for impairment annually.
- Recognized only in a business combination.
Memory trick: Total value paid, minus net assets laid.