Firenze Company developed a specialized banking application software program that it licenses to various financial institutions through multiple-year agreements. On January 1, 2014, these licensing agreements have a fair value of $812,500 and represent Firenze’s sole asset. Although Firenze currently has no liabilities, the company has a $181,000 net operating loss (NOL) carryforward because of recent operating losses.
On January 1, 2014, Parma, Inc., acquired all of Firenze’s voting stock for $980,000. Parma expects to extract operating synergies by integrating Firenze’s software into its own products. Parma also hopes that Firenze will be able to receive a future tax reduction from its NOL. Assume an applicable federal income tax rate of 35 percent.
a. If there is a greater than 50 percent chance that the subsidiary will be able to utilize the NOL carryforward, how much goodwill should Parma recognize from the acquisition?
b. If there is a less than 50 percent chance that the subsidiary will be able to utilize the NOL carryforward, how much goodwill should Parma recognize from the acquisition?