Goodwill Results from the Purchase of One Firm by Another

question 17

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, 2017, Blue Grass Co. purchased Red Grass Co. for $2,400,000 when the net assets were valued at $2,000,000. Goodwill will be tested annually for impairment. Assume that after the first year there was an impairment of $30,000.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:

Predetermined Overhead Rate

A rate used to allocate indirect costs to products or services, estimated before the costs are incurred.

Direct Material

Raw materials directly used in the manufacturing of a product, explicitly traceable to the goods being produced.

Direct Labor

Labor costs directly tied to the production of goods or services, such as wages for assembly line workers.

Probability Distributions

Mathematical functions that provide the probabilities of occurrence of different possible outcomes for an experiment.