Goodwill
Response to the following problem:
The Hamilton Company balance sheet on January 1, 2010 was as follows:
|
Cash
|
$ 30,000
|
Current liabilities
|
20,000
|
|
Accounts receivable
|
80.000
|
Bonds payable
|
120,000
|
|
Marketable securities (short-term)
|
40,000
|
Pension liability
|
50,000
|
|
Inventory
|
100,000
|
Common stock
|
200,000
|
|
Property, plant, and equipment (net)
|
200.000
|
Retained earnings
|
60,000
|
|
|
$450,000
|
|
$450,000
|
The Korbel Company is considering purchasing the Hamilton Company (a privately held company) and discovers the following about the Hamilton Company:
1. No allowance for uncollectibles has been established. A $10,000 allowance is considered appropriate.
2. Marketable securities are valued at cost. The current market value is $60,000.
3. The LIFO inventory method is used. The FIFO inventory of $140,000 would be used if the company is acquired.
4. Land, included in property, plant, and equipment, which is recorded at its cost of $50,000, is worth $120,000. The remaining property, plant, and equipment is worth 10% more than its depreciated cost.
5. The company has an unrecorded trademark that is worth $70,000.
6. The company's bonds are currently trading for $130,000 and the common stock for $300,000.
7. The pension liability is understated by $40,000.
Required
1. Compute the value of the implied goodwill if the Korbel Company agrees to pay $500,000 cash for the Hamilton Company.
2. Prepare the journal entry to record the acquisition on the books of the Korbel Company, assuming the Hamilton Company is liquidated.
3. If the Korbel Company agrees to pay only $400,000 cash, how much is the implied goodwill?
4. If the Korbel Company pays only $400,000 cash, prepare the journal entry to record the acquisition on its books, assuming the Hamilton Company is liquidated.