Assume that one of your clients asks for your assistance in allocating the $$9\mathrm{.}000,000$ cost of a $100\%$ acquisition of a competitor firm. You estimate the fair value of the net assets on the investee's balance sheet at $$6,000,000.$ However, there is$,$ in addition, an unrecorded trademark valued at $$1,700,000.$ The intangible asset has an indefinite useful life.

Required:

a$.$ What amount of goodwill will be recorded? $(4$ points$)$

b$.$ What will be the effect of the goodwill and brand name on the annual income statement? $(4$ points$)$

c$.$ Now assume that the agreement between the investor and investee calls for an additional payment of $$500,000$ contingent upon the investee reaching a certain level of income within three years. You estimate the fair value of the potential payment at $$400,000.$ What effect, if any, does the potential payment have on the amount of goodwill recognized?

Answer rating: 100% (QA)

a Calculation of Goodwill Fair value of net assets 6000000 Unrecorded trademark 1700000 Total fair value of net assets 6000000 1700000 7700000 Purchas... View the full answer