Question

Goodwill

Stillman Company is considering purchasing EKC Company. EKC's balance sheet at December 31, 2016, is as follows:

Cash	$54,000		Current liabilities	$56,000
Accounts receivable	71,000		Bonds payable	243,000
Inventory	130,000		Common stock	250,000
Property, plant, and equipment (net)	620,000		Retained earnings	326,000
	$875,000			$875,000

At December 31, 2016, Stillman discovered the following about EKC:

No allowance for uncollectible accounts has been established. An allowance of $4,500 is considered appropriate.

The LIFO inventory method has been used. The FIFO inventory method would be used if EKC were purchased by Stillman. The FIFO inventory valuation of the December 31, 2016, ending inventory would be $199,000.

The fair value of the property, plant, and equipment (net) is $720,000.

The company has an unrecorded patent that is worth $100,000.

The book values of the current liabilities and bonds payable are the same as their market values.

Required:

1. Compute the value of the goodwill if Stillman pays $1,265,500 for EKC.

$

2. Why would the book value of a company's identifiable net assets differ from its market value?

Answer 1

Stillman Company
Requirement 1
Computation of value of goodwill
	Net assets taken over			Amount
	Cash			54000
	Accounts receivable			66500
	Inventory			199000
	Property, Plant and equipment			720000
	Unrecorded patent			100000
	Total asset				1139500
	Less
	Current liabilities			56000
	Bonds payable			243000	299000
	Net assets taken over				840500
	Stillman pays				1265500
	Goodwill				425000
Requirement 2
	There are various reason for book value of company's identifiable net asset differ from its market value
	Some of them are as follows
	1	Identifiable net asset like property, plant and equipment are generally recorded
		at their historical cost which may be different from their market value.
	2	Company may not have the policy of creating allowance for certain asset like
		Accounts receivable.
	3	There might be different accounting policy followed for some asset like inventory,
		for example, instead of following FIFO or weighted average method, some
		company follows LIFO method and vice versa giving rise to book value differ
		from its market value
	4	Some accounting policy may not allow the recognition of self generated intangible
		asset like patent and goodwill.