Question

During 20X4, the Pencil Corp. entered into negotiations to buy Stilo Company, finally agreeing on a final cash purchase price of $534,000. Pencil will acquire all assets and liabilities of Stilo effective 31 December 20X4, except for the existing cash balances of Stilo.

The 31 December 20X4 balance sheet prepared by Stilo is shown below in column (a), and the revised fair values added later by Pencil are shown in column (b).

STILO COMPANY BALANCE SHEET
At 31 December 20X4	(a) Book Values of Stilo Co.	(b) Fair Values assigned by Pencil Corp.
Assets
Cash	$    50,000	n/a
Accounts receivable (net)	106,000	$ 108,000
Inventory	320,000	180,000
Property, plant, and equipment (net)	618,000	570,000
Land	22,000	80,000
Franchise (unamortized balance)	38,000	42,000
Total	$1,154,000
Liabilities and shareholders’ equity
Current liabilities	$    74,000	74,000
Bonds payable	400,000	400,000
Shareholders’ equity	680,000	n/a
Total	$1,154,000

Required

1. Compute the amount of goodwill purchased by Pencil.
2. Give the entry for Pencil to record the purchase of Stilo.

Answer 1

Value of goodwill = Current liabilities + Bonds payable + Cash to be paid - (Accounts receivable + Inventory + Property, plant, and equipment + Land + Franchise)

= 74,000 + 400,000 + 534,000 - (108,000 + 180,000 + 570,000 + 80,000 + 42,000)

= 1,008,000 - 980,000

= $28,000

Journal

	Accounts receivable	108,000
	Inventory	180,000
	Property, plant and equipment	570,000
	Land	80,000
	Franchise	42,000
	Goodwill	28,000
	Current liabilities		74,000
	Bonds payable		400,000
	Cash		534,000

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