Company ABC Acquires Company XYZ on 12/31/06 in a Share-For-Share

question 91

Multiple Choice

Company ABC acquires company XYZ on 12/31/06 in a share-for-share transaction worth $10M. On 12/31/06, XYZ financial statements reported the following:
$$\begin{array} { | l | r | } \hline \text { Total Assets } & \$ 12 \mathrm { M } \\\hline \text { Liabilities } & \$ 8 \mathrm { M } \\\hline \text { Stockholders' Equity } & \$ 4 \mathrm { M } \\\hline \text { Net income for fiscal 2006 } & \$ 2 \mathrm { M }\\\hline\end{array}$$ At the time of acquisition, the fair value of XYZ's assets equals its book values, except for plant, property and equipment which has a fair value $2M higher than its book value. Goodwill is expected to be amortized over 10 years, and the average life of depreciable assets is 10 years.
-If ABC uses pooling-of-interests to record the acquisition, the amount of goodwill that will appear on its balance sheet as of 12/31/06 with respect to the acquisition of XYZ will be:

• A) $0
• B) $2M
• C) $4M
• D) $6M

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Definitions:

Government Bond

A debt security issued by a government to support government spending, often considered a low-risk investment.

Market Rate

The prevailing interest rate available in the marketplace for loans or deposits of a specific maturity.

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The fraction of depositors' balances that banks must have on hand as cash, determined by the central bank to control money supply.