Cash Inventory Equipment (net) Total Wood $150,000 450,000 1,320,000 $1,920,000 Rose $30,000 150,000 570,000 $750,000 Total...

Solution

a. Determination of the purchase price above which would Wood record goodwill:

Computations –

Fair value of identifiable net assets –

Book value 750,000 – 150,000 = 600,000

Write up of inventory and equipment $75,000

(inventory – 180,000 – 150,000 = 30,000; equipment 615,000 – 570,000 = 45,000)

Purchase price above which Wood would record goodwill = $675,000

b. Determination of the purchase price at which Wood record a $50,000 gain:

A ‘gain’ occurs when there is a difference in the purchase price and the fair value. Hence, when the purchase price is less than fair value, it results in a gain.

Fair value of net identifiable assets = $675,000

Less: gain $50,000

Hence, purchase price at which Wood record a $50,000 gain is $625,000.

Note – the company would eliminate any existing goodwill prior to recording a gain.

c. Determination of the purchase price below which would obtain a ‘bargain’:

A ‘bargain’ results when assets are acquired for less than fair value.

Computed purchase price - $675,000

Wood would consider any price below $675,000 as ‘bargain’.

d.

Determination of the purchase price at which Wood would record $75,000 goodwill:

Goodwill results when the consideration paid exceeds the fair value of identifiable assets.

Fair value of net identifiable assets = $675,000

Add: Goodwill $75,000

Hence, purchase price at which Wood record $75,000 goodwill = $750,000