Grande Company is negotiating the acquisition of 30 percent of the outstanding shares of Chico Company. Chico's balance sheet reports assets of $500,000 and liabilities of $300,000 for a net book value of $200,000. After investigation, Grande determines that Chico's equipment is undervalued in the company's financial records by $60,000. One of its patents is also undervalued, but only by $40,000. By adding these valuation adjustments to Chico's book value, Grande arrives at an estimated $300,000 worth for the company's net assets. Based on this computation, Grande offers $90,000 for a 30 percent share of the investee's outstanding stock. 

Allocate the cost of Grande's investment: 

Payment by Grande (investor)
Percentage of book value acquired (30 % x 200,000 )
Payment in excess of book value
Excess payment identified with specific assets:
Equipment (undervaluation $60,000 x percentage acquired) 60,000 x 30%
Patent (undervaluation $40,000 x percentage acquired) 40,000 x 30%
Total
Excess payment NOT identified with specific assets - goodwill

 

Example 2: Now let's assume Grande offers $125,000 for a 30% share of Chico. How much would you record for Goodwill? 

Goodwill =  

The amortization process: 

Payment relating to each asset (except land, goodwill, and other indefinite life intangibles) should be amortized over an appropriate time period. 

Cost assigned / useful life = annual amortization 

Compute the total annual amortization for Grande company 

Required:

1) Prepare journal entry to record the annual amortization expense