Elizabeth Pie Company has been in business for 50 years and has developed a large group of loyal restaurant customers. Giant Bakery Inc. has made an offer to buy Elizabeth Pie Company for $5,100,000. The book value of Elizabeth Pie’s recorded assets and liabilities on the date of the offer is $4,350,000 with a fair value of $4,600,000. Elizabeth Pie also (1) holds a patent for a pie crust fluting machine that the company invented (the patent with a fair value of $305,000 was never recorded by Elizabeth Pie because it was developed internally) and (2) estimates goodwill from loyal customers to be $306,000 (also never recorded by the company).
If Elizabeth Pie Company management accepts Giant Bakery's offer of $5,100,000. Compute the amount of goodwill that Giant Bakery should record on the date of the purchase.

Customer loyalty is part of a company's goodwill, so it will not be included in this calculation. Goodwill is the difference between the acquisition price of a company and the fair value of its assets.

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fichoh fichoh · Answer 2 · 2021-11-11T10:24:14+01:00

The goodwill value is the premium amount paid in the purchase of an asset beyond the fair market value of the asset. Hence, the goodwill paid by Giant Bakery Inc. on the date of purchase is $195,000

Goodwill = Amount paid - (fair value - patent value)

Offer value = $5,100,000
Fair value = $4,600,000
Patent value = $305,000

Therefore, Amount of Goodwill can be calculated thus :

$(5100000 - (4600000 + 305000)) = $195,000

Hence, the amount of goodwill that Giant Bakery should record on the date ls $195,000

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