Series 79 practice questionhardPro Forma Financial Statements
In preparing pro forma statements for a $1 billion acquisition, the target's net tangible assets have a fair value of $300 million and identifiable intangible assets are valued at $250 million. How much goodwill is created in the transaction?
- A$700 million
- B$450 million✓ Correct answer
- C$500 million
- D$750 million
Explanation
Why B — $450 million
Goodwill is calculated as the excess of the purchase price over the fair value of identifiable net assets. Goodwill = Purchase Price - Fair Value of Net Tangible Assets - Fair Value of Identifiable Intangible Assets = $1,000M - $300M - $250M = $450M. Goodwill represents the premium paid for factors such as brand value, customer relationships, and synergies that are not separately identifiable. Under current US GAAP, goodwill is not amortized but is tested annually for impairment.
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