Goodwill Results from the Purchase of One Firm by Another

question 15

Essay

Goodwill results from the purchase of one firm by another for a price that is greater than the fair value of the net assets acquired. On January 1, 2014, Blue Grass Co. purchased Red Grass Co. for $1,200,000 when the net assets were valued at $1,000,000. Goodwill will be tested annually for impairment. Assume that after the first year there was an impairment of $15,000.
Required:
(a.) Compute the value of goodwill to be recorded on the books of Blue Grass Company upon the purchase of the business.
(b.) What is impairment and how is the first year's impairment recorded in the books?

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Definitions:

Marginal Analysis

Marginal analysis is the examination of the benefits and costs of an incremental change in the production or consumption of goods or services.

Coupon

A promotional tool in the form of a voucher that offers a discount or rebate on the purchase of a product or service.

Marginal Analysis

Marginal Analysis is an assessment method used to evaluate the impact of a small change in production levels or economic activity, focusing on the cost and benefit of making that change.

Real Estate

Property consisting of land and the buildings on it, along with its natural resources, including mineral deposits, crops, and water.