Question

Stacy is interested in purchasing Spud's Potato Chip Company. Spud's assets are:

	Adjusted Basis	Fair market Value
Cash	2,300	2,300
Inventory	16,500	19,200
Equipment	13,000	9,000
Land	10,000	40,500
Building	66,600	129,000
Total	$108,400	$200,000

1. Prepare a table showing the basis of each asset if Stacy pays a total of $240,000 for all the assets.

2. Prepare a table showing the basis of each asset if Stacy buys all the stock of Spud's for $240,000.

Answer 1

1. Computation of table showing basis of assets:

Asset	Adjusted basis	Fair market value	Basis
Cash	2300	2300	FMV 2300
Inventory	16500	19200	Adjusted basis 16500
Equipment	13000	9000	FMV 9000
Land	10000	40500	FMV 40500
Building	66600	129000	FMV 129000
Total	108400	200000	197300

Value paid for all the assets = $240000

Actual value of the assets = $ 197300

Here, the balancing figure will be goodwill.

Goodwill = 240000 - 197300

Goodwill = $ 42700

(B) By stock we mean the inventory held by the company. These are the current assets which can be convertible into cash and cash equivalents.

If Stacy buys only stock of the company which will be lower of cost or net realisable value, then there is no need for calculation of basis of other assets. It is so because the value is paid for stock only and not to all the assets.

Value of stock = $16500 or $ 19200 whichever is lower.

Thus,Value of stock = $16500

Here, the balancing figure will be goodwill.

Goodwill = 240000 - 16500

Goodwill = $223500