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Answer :
The amount of goodwill from the Hat Ltd purchase of the Cat Store is calculated to be $1,025,000. This is determined by adding the cash consideration and fair value of the land, adjusting the fair value of the assets, subtracting the liabilities, and finding the excess of the purchase consideration over the net assets at fair value.
To calculate the amount of goodwill in the Hat Ltd purchase of the Cat Store, we follow the steps of identifying the purchase consideration, fair value adjustments, and then determining the goodwill according to accounting standards.
Calculate total purchase consideration, which includes cash and the fair value of the land transferred:
Cash: $950,000
Land: Fair value of $295,000
Total purchase consideration = $950,000 + $295,000 = $1,245,000.
Identify the fair value of the Cat Store's net assets: Assets are $290,000; however, the building needs a fair value adjustment:
Building's book value: $60,000
Building's fair value: $85,000
Adjustment to building's value: $85,000 - $60,000 = $25,000
Fair value of Cat Store's assets = $290,000 + $25,000 = $315,000.
Subtract the liabilities to find the net assets at fair value:
Liabilities: $95,000
Net assets at fair value = $315,000 - $95,000 = $220,000.
Goodwill is the excess of purchase consideration over fair value of net assets acquired:
Goodwill = Total purchase consideration - Net assets at fair value
Goodwill = $1,245,000 - $220,000 = $1,025,000.
Therefore, the amount of goodwill from the Hat Ltd purchase is $1,025,000.
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