Juliana Corporation purchased all of the outstanding stock of Caldwell Inc., paying $4,500,000 cash. Juliana assumed all of the liabilities of Caldwell. Book values and fair values of acquired assets and liabilities were:

Book Value Fair Value

Current assets (net) $230,000 $540,000

Property, plant, & equip. (net) 1,650,000 2,080,000

Liabilities 490,000 660,000

Juliana would record goodwill of:

$ 2,540,000.

$ 3,120,000.

$ 170,000.

$ 7,800,000.

The answer is $2,540,000

Explanation:

Using Fair Value (FV) method:

Fair Value of Total Assets = FV of Property, Plant & Equipment + FV of Current Assets.

FV of Total Assets = $2,080,000+$540,000 = $2,620,000

FV of Liability (As given) = $660,000

FV of Net Assets = FV of Total Assets - FV of liabilities

= $2,620,000-$660,000 = $1,960,000

Goodwill = Consideration paid - FV of Net Assets of the acquired company.

= $4,500,000-$1,960,000

= $2,540,000.

Goodwill represents the extra amount paid on the acquired company in excess of its net assets. This could be because the acquired has a stronger brand, better customer base or any other values that the acquirer considered as valuable for their business.