On January 1, 2009, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:

Compute the goodwill recognized in consolidation.

A) $800,000.
B) $310,000.
C) $124,000.
D) $0.
E) $(196,000.)

Question

On January 1, 2009, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:

Compute the goodwill recognized in consolidation.

A) $800,000. 
B) $310,000. 
C) $124,000. 
D) $0. 
E) $(196,000.)

Quizplus · Accepted Answer

Calculation of Goodwill:

Consideration Transferred for 80% common stock = $1,200,000
Fair Value of 80% common stock = $1,400,000 ($1,200,000/0.8)
Book Value of 80% common stock = $1,050,000
Excess of FV over BV = $350,000 (Goodwill)

Consideration Transferred for 40% preferred stock = $124,000
Fair Value of 40% preferred stock = $155,000 ($124,000/0.8)
Book Value of 40% preferred stock = $138,000
Excess of FV over BV = $17,000

Therefore, total goodwill recognized in consolidation = $367,000
(Excess of FV over BV of common stock + Excess of FV over BV of preferred stock)

Hence, the correct answer is B) $310,000.

On January 1, 2009, Nichols Company Acquired 80% of Smith