Ernie Company acquired Bert Company in January of Year 1. Bert's balance sheet included $700,000 of assets, $250,000 of liabilities and stockholders' equity of $450,000. Ernie agrees to assume the liabilities and pay $480,000 to acquire Bert. An independent appraiser assessed the fair value of Bert's assets to be $630,000. Indicate whether each of the following statements about this transaction is true or false.________ a) Ernie's entry to record the transaction includes a debit to the assets for $700,000.________ b) Ernie's entry to record the transaction includes a debit to liabilities for $250,000.________ c) Ernie will recognize $100,000 of goodwill in recording the acquisition of Bert.________ d) It is impossible for Ernie to estimate the length of life for goodwill.________ e) The
goodwill will be amortized in the same manner as patents.
What will be an ideal response?
a) F b) F c) T d) T e) F
a) This is false. The transaction will include a debit to the assets for $630,000, the fair value of the assets.
b) This is false. Liabilities will be credited, not debited, for their carrying amount on Bert's books.
c) This is true. Goodwill = Price paid of $480,000 + Liabilities assumed of $250,000 ? Fair value of assets acquired of $630,000 = $100,000
d) This is true. Goodwill is an intangible asset that does not have an identifiable life.
e) This is false. Goodwill is not amortized, but is tested annually for impairment.
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