Sienna Company developed a specialized banking application software program that it licenses to various financial institutions through multiple-year agreements. On January 1, 2024, these licensing agreements have a fair value of $900,000 and represent Sienna’s sole asset. Although Sienna currently has no liabilities, the company has a $155,000 net operating loss (NOL) carry-forward because of recent operating losses.

On January 1, 2024, Paoli, Inc., acquired all of Sienna’s voting stock for $1,120,000. Paoli expects to extract operating synergies by integrating Sienna’s software into its own products. Paoli also hopes that Sienna will be able to receive a future tax reduction from its NOL. Assume an applicable federal income tax rate of 21 percent.

a. If there is a greater than 50 percent chance that the subsidiary will be able to utilize the NOL carry-forward, how much goodwill should Paoli recognize from the acquisition?

b. If there is a less than 50 percent chance that the subsidiary will be able to utilize the NOL carryforward, how much goodwill should Paoli recognize from the acquisition?