Relation between Purchase Price, Goodwill, and Negative Goodwill The following balance sheets were reported on January 1, 2004, for Peach Company and Stream Company. LO4 Peach Stream Cash $ 100,000 $ 20,000 Inventory 300,000 100,000 Equipment (net) 880,000 380,000 Total $1,280,000 $500,000 Total Liabilities $ 300,000 $100,000 Common Stock, $20 par value 400,000 200,000 Other Contributed Capital 250,000 70,000 Retained Earnings 330,000 130,000 Total $1,280,000 $500,000 Required:
Appraisals reveal that the inventory has a fair value of $120,000 and that the equipment has a current value of $410,000. The book value and fair value of liabilities are the same.
Assuming that Peach Company wishes to acquire Stream for cash in an asset acquisition, determine the following cutoff amounts:
A. The purchase price above which Peach would record goodwill.
B. The purchase price below which the equipment would be recorded at less than its fair market value.
C. The purchase price below which Peach would record an extraordinary gain.
D. The purchase price below which Peach would obtain a “bargain.”
E. The purchase price at which Peach would record $50,000 of goodwill.