CFA Practice Question

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CFA Practice Question

On June 30th, 2009, Plum Corporation acquired the stock of Strawberry Company. Plum purchased for cash all 200,000 shares of Strawberry's common stock for $18 per share. On this date, the carrying value of Strawberry's net assets on their balance sheet was $2,500,000 and the fair market value of their plant assets exceeded its carrying value by $500,000. What amount of goodwill should Plum report on its 6/30/2009 balance sheet related to this transaction?

A. $0.
B. $500,000.
C. $600,000.
Correct Answer: C

Goodwill is the excess of the investment cost over the fair market value of the identifiable assets. The amount would be determined as follows:

Investment cost (200,000 shares @18) = 3,600,000.
FMV of identifiable assets 3,000,000*
Goodwill to be reported 600,000.

* 2,500,000 carrying amount + 500,000 FMV excess on plant assets.

User Contributed Comments 2

User Comment
johnowens this is very simple.
Purchase Cost = (18)(200,000) = $3.6m Fair Value of Company's Assets = 2.5m + 500k = $3m
Therefore Goodwill = $600k
yxten1 1. Find out Acquisition price (180,000 * $18)
2. Acquisition Price (-) Book Value of acquiress (3,600,000 - 2,500,000)
3. Adjust acquiree book value to fair value (500,000)
4. Goodwill = 3,600,000 - 2,500,000 - 500,000 = 600,000
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