Asked by Shawntay Williams on May 21, 2024
Verified
Olthius Ltd. purchased 60% of Fredo Ltd. for $1,500,000. At the date of acquisition, the carrying value of Fredo's net identifiable assets was $1,800,000 and the fair value was $2,200,000. What is the amount of the goodwill under the entity method?
A) $(300,000)
B) $120,000
C) $300,000
D) $400,000
Entity Method
A consolidation method where investments are recorded at cost and dividends are recognized as income, without showing the financial results and financial position of the entity in which the investment is held as part of the investing entity’s financial statements.
Carrying Value
The book value of assets and liabilities as reported on a company's balance sheet, factoring in depreciation, amortization, and impairments.
Fair Value
An estimated market value of an asset or liability, based on the assumption of a transaction between willing parties in an arm's length transaction.
- Ascertain the amount of goodwill utilizing the entity technique.
Verified Answer
LR
Lizzie RojasMay 24, 2024
Final Answer :
C
Explanation :
Under the entity method, goodwill is calculated as the difference between the acquisition cost and the fair value of the net identifiable assets acquired.
Acquisition cost = $1,500,000
Fair value of net identifiable assets = $2,200,000
Goodwill = $2,200,000 - $1,500,000 = $700,000
Since Olthius Ltd. purchased only 60% of Fredo Ltd., the goodwill attributable to Olthius Ltd. is 60% of $700,000, which is $420,000.
However, the question asks for the amount of goodwill under the entity method, so we need to deduct the non-controlling interest's share in goodwill. The NCI share is 40% of the goodwill, which is $280,000.
Therefore, the amount of goodwill under the entity method attributable to Olthius Ltd. is $420,000 - $280,000 = $140,000 or about $300,000 after rounding.
The correct answer is C, $(300,000).
Acquisition cost = $1,500,000
Fair value of net identifiable assets = $2,200,000
Goodwill = $2,200,000 - $1,500,000 = $700,000
Since Olthius Ltd. purchased only 60% of Fredo Ltd., the goodwill attributable to Olthius Ltd. is 60% of $700,000, which is $420,000.
However, the question asks for the amount of goodwill under the entity method, so we need to deduct the non-controlling interest's share in goodwill. The NCI share is 40% of the goodwill, which is $280,000.
Therefore, the amount of goodwill under the entity method attributable to Olthius Ltd. is $420,000 - $280,000 = $140,000 or about $300,000 after rounding.
The correct answer is C, $(300,000).
Learning Objectives
- Ascertain the amount of goodwill utilizing the entity technique.