Exercise 2-11 Relation between Purchase Price, Goodwill, and Negative Goodwill

The following

balance sheets were reported on January 1, 2004, for Peach Company and Stream Company

	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 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.