CPA Exam - FAR (Financial Accounting and Reporting)Select TransactionsMedium
A company acquires a subsidiary for $1,200,000. The fair value of the identifiable net assets acquired is $1,000,000. The acquisition also incurred $50,000 in legal fees and $20,000 in due diligence costs. What amount of goodwill should the company recognize from this business combination?
- A$270,000
- B$200,000
- C$130,000
- D$250,000
Show answer & explanationAnswer & explanation
Correct answer: B. $200,000
Goodwill is calculated as the excess of the consideration transferred over the fair value of identifiable net assets acquired. Acquisition-related costs (legal fees, due diligence) are expensed as incurred and do not affect the calculation of goodwill.
Why the other options are wrong
- A. This incorrectly adds acquisition-related costs to goodwill.
- C. This incorrectly subtracts acquisition-related costs from goodwill.
- D. This incorrectly adds only legal fees to goodwill.
Goodwill in Business Combinations
Goodwill is an intangible asset recognized in a business combination, representing the excess of the consideration transferred over the fair value of identifiable net assets acquired.
- Goodwill = Consideration Transferred - Fair Value of Identifiable Net Assets.
- Acquisition-related costs (legal, advisory, due diligence) are expensed.
- Goodwill is not amortized but tested for impairment annually.
Memory trick: COMBINE assets, find GOODWILL, and EXPENSE acquisition costs.