Goodwill (initial calculations)

Lesson:

When a company buys another business, it has make updates to its financial ledger.

Often it has to add value of goodwill, the amount paid over the fair market value of the acquired firm's net identifiable assets.

Goodwill can never be generated internally, and it can never be lower than zero.

These are the steps to calculate goodwill:

  1. Calculate the value of assets of the purchased business
  2. Calculate the value of liabilities of the purchased business
  3. Calculate the fair value of net identifiable assets (assets - liabilities)
  4. Compare purchase price to fair value of net identifiable assets
  5. If the purchase price > the fair value of net identifiable assets, the difference is the goodwill
You're a tax accountant, trying to figure out the goodwill resulting from a recent acquisition.

This is what you've been told:

  • There's a $94 balance in intangible assets
  • There's a $67 balance in accounts receivable
  • There's a $66 balance in current portion of long-term debt obligations
  • There's a $24 balance in PP&E
  • The firm was purchased for $71
What is the goodwill for the purchased company?

Answer:

  • There is no goodwill

Explanation:

  1. First, we need to figure out the net assets of the purchased firm.
    NET ASSETS = ASSETS - LIABILITIES
  2. Next, Let's plug in the assets.
    NET ASSETS = $94 + $24 + $67 - LIABILITIES
  3. Next, Let's plug in the liabilities.
    NET ASSETS = $94 + $24 + $67 - $66
  4. Next, Let's do the math.
    NET ASSETS = $119
  5. Now let's compare the purchase price to net assets
    PURCHASE PRICE = $71
  6. Since the purchase price is not greater than the net assets, we don't have goodwill.
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