The management of Private Storage became aware of another privately held storage company Local Storage whose owners wished to sell the business in order to retire. The management of Private Storage and the owners of Local Storage reached an agreement for Private Storage to acquire Local Storage for $200,000 cash. They also agreed to have valuation experts determine the fair value of all of Local Storages assets and liabilities.

At 9:00 a.m. August 31, 2023, Private Storage acquired the assets and liabilities of Local Storage for a purchase price of $200,000. On August 31, 2023, the valuation experts determined that the fair value of the identifiable assets and liabilities of Local Storage was $280,000.

The final item the controller of Private Storage needs to do to complete the financial statements for the year ending 8/31/23 is to record the acquisition of Local Storage.

Prior to the acquisition of Local Storage on August 31st, 2023, Private Storage had total net assets of $3,000,000 including Goodwill of $400,000 and net income of $650,000.

After the acquisition was concluded on August 31st, the controller of Private Storage recorded all the assets and liabilities of Local Storage at their fair values and recorded a credit to Goodwill for $80,000. After the entries to record the acquisition of Local Storage the ending balance for Goodwill was $320,000.

Assume you are the auditor who is verifying the accounting for the consolidation including goodwill. You have verified that the assets and liabilities were recognized correctly. However, you are not sure if goodwill was recognized correctly and if the ending balance for Goodwill is correct.

What is the correct ending balance of Goodwill after the acquisition of Local Storage? The correct 8/31/23 ending balance of Goodwill is:

1. $320,000
2. $400,000
3. $480,000
4. $680,000