Computation of goodwill Assume that an investor purchases 100% of an investee company for $16 million in a transaction that qualifies as a business combination. The fair values of the identifiable net assets are as follows:

Computation of goodwill

Assume that an investor purchases 100% of an investee company for $16 million in a transaction that qualifies as a business combination. The fair values of the identifiable net assets are as follows:

Tangible net assets:Receivables, inventories, PPE, payables, and accruals$4 millionIntangible assets:Patents, customer lists, trade name, software, etc.1 millionResearch and development assets:Research projects in process at the investee company2 million

In addition to the purchase price, the investor also incurs acquisition-related costs amounting to $1.8 million for professional fees and the internal allocation of overhead relating to the purchase.

a. How much of the purchase price is assigned to Goodwill?

$Answer million

b. How do we account for Goodwill subsequent to the acquisition?

Goodwill is reported on the consolidated balance sheet, amortized over its useful life, and written-down if impaired.

Goodwill is reported on the consolidated balance sheet and remains on the balance sheet until deemed impaired.

Goodwill is not reported on the consolidated balance sheet.

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