On January 1, 2011, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30 percent of Involved's preferred stock, and $1,850,000 for 80 percent of its outstanding common stock. As of the date of the acquisition, Involved's stockholders' equity accounts were as follows:

Assuming Involved's accounts are correctly valued within the company's financial statements, what amount of goodwill should be recognized for the Investment in Involved?

A) $(100,000.)
B) $0.
C) $200,000.
D) $812,500.
E) $2,112,500.

Question

On January 1, 2011, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30 percent of Involved's preferred stock, and $1,850,000 for 80 percent of its outstanding common stock. As of the date of the acquisition, Involved's stockholders' equity accounts were as follows:

Assuming Involved's accounts are correctly valued within the company's financial statements, what amount of goodwill should be recognized for the Investment in Involved?

A) $(100,000.) 
B) $0. 
C) $200,000. 
D) $812,500. 
E) $2,112,500.

Quizplus · Accepted Answer

To calculate the goodwill, we need to first calculate the fair value of identifiable assets and liabilities of Involved, Inc.

Fair value of identifiable assets = $2,250,000 
($750,000 for preferred stock + $1,500,000 for common stock)

Fair value of identifiable liabilities = $1,437,500 
($750,000 of preferred stock and $250,000 of common stock)

Fair value of net identifiable assets = $812,500 
($2,250,000 - $1,437,500)

To calculate the goodwill, we need to subtract the fair value of net identifiable assets from the purchase price:

Goodwill = Purchase price - Fair value of net identifiable assets 
Goodwill = $2,600,000 - $812,500 
Goodwill = $1,787,500

Therefore, the amount of goodwill should be recognized for the Investment in Involved is $1,787,500, and the correct choice is D.

On January 1, 2011, Harrison Corporation Spent $2,600,000 to Acquire