Question

Bluth, Inc., purchased 100% of the common shares of Horten for $280,000 on January 1, 20X7. Horten's balance sheet just before the acquisition was as follows ($ in thousands):

BALANCE SHEET:
Cash $100
Net fixed assets $ 190
Total assets $290
Liabilities $200
Stockholders' equity $90
Total L&SE $290

Requirement 1: Compute the amount of goodwill Bluth would recognize on this purchase. Where would this goodwill appear on Bluth's financial statements?

Requirement 2: Bluth's 20X7 net income from all operations excluding those of Horten was $140,000. Horten had a net loss of $9,000. Assume there were no intercompany transactions. Compute consolidated net income for 20X7.

Requirement 3: Repeat requirement 2 assuming Bluth concluded goodwill was impaired by $15,000.

Requirement 4: How much goodwill appears on the consolidated balance sheet after requirement 3?

Answer 1

1. GoodWill Computation = Amount Paid by Bluth Inc for Horten - (Total Assets - Liabilities)

= $ 280000 - ( 290000 - 200000)

= 280000- 90000 = 190000

Hence, Goodwill of $ 190000 would reflect on the Asset Side of the Bluth's Financial Statements.

2. Consolidated Net Income of Bluth = Net Income of Bluth + Net Loss of Horton

= 140000 - 9000

= $ 131000

3. Consolidated Net Income of Bluth = (Net Income of Bluth - Goodwill Impairment ) + Net Loss of Horton

= (140000 - 15000) - 9000

= 125000 - 9000

= $ 116000

4. Goodwill of Consolidated Balance Sheet = 190000 - 15000

                                                               =$ 175000