On February 25, 2011, Medtronic , the Minneapolis-based medical technology company, bought 100% of Jolife AB , a company that develops, manufactures, and markets the LUCAS Chest Compression System together with complementary technologies. The purchase price was $53 million.
Medtronic acquired no tangible assets, technology-based intangible assets with a useful life of 10 years that were valued at $46 million, and $11 million of tangible liabilities.
1. Compute the amount of goodwill recognized at the time of purchase.
2. Medtronic had pretax earnings of $3,723 million in fiscal 2011. Assume that these exclude earnings or losses from Jolife. Suppose that Medtronic’s on-going operations (that is, excluding the results of Jolife) had the same results for fiscal 2012 as for fiscal 2011 and that Jolife had a pretax loss for fiscal 2012 of $5 million. What consolidated net income would Medtronic report for fiscal 2012? Assume that neither Medtronic nor Jolife had sales to the other.
3. How would the consolidated net income computed in number 2 change if the entire excess of the purchase price over the value of tangible assets less liabilities had been assigned to goodwill?