Exercise 3 (LO 5) Simple value analysis. Flom Company is considering the cash purchase of 100% of the outstanding stock of Vargas Company. The terms are not set, and alternative prices are being considered for negotiation. The balance sheet of Vargas Company shows the following values:

Assets Liabilities and Equity

Cash equivalents . . . . . . . . . . . . . . $ 60,000 Current liabilities . . . . . . . . . . . . . . $ 60,000

Inventory . . . . . . . . . . . . . . . . . . . . 120,000 Common stock ($5 par). . . . . . . . . 100,000

Land. . . . . . . . . . . . . . . . . . . . . . . . 100,000 Paid-in capital in excess of par . . . 150,000

Building (net) . . . . . . . . . . . . . . . . . 200,000 Retained earnings . . . . . . . . . . . . . 170,000

Total assets. . . . . . . . . . . . . . . . . $480,000 Total liabilities and equity . . . . . $480,000

Appraisals reveal that the inventory has a fair value of $160,000 and that the land and building have fair values of $120,000 and $300,000, respectively.

1. Above what price will goodwill be recorded?

2. Below what price will a gain be recorded?