 Hello and welcome to the session. This is Professor Farhad in which we would look at this CPA questions that was sent to me from one of my subscribers from farhadlectures.com. The subscriber wanted me to go over this question in details to see how we came up with the answer. So let's go ahead and take a look at this question and the question of the problem reads, which of the following is the amount of goodwill that should be recognized as the result of the business combination? So simply put, do you know how to compute the amount of goodwill? That's basically what we are being asked to do. First of all, do you know what goodwill is? Well, the goodwill is the amount that you paid that's above and beyond the fair market value of the net identifiable asset. So when you buy a company, you would look at their fair value. You would look at their fair value, fair market value to be more specific, fair market value, including all identifiable asset, whether they are on the books or you can identify them. Let's assume just for the sake of simplicity, you looked at a company and the net asset fair value to be more specific, net asset, and when we say net asset, just I want to make sure you understand what this net asset is. When we heard the word net assets, it means you are subtracting something from assets. What are you subtracting? It's assets, minus liabilities. That's gives us net asset. And if you hopefully you know this, that net asset is the same thing as equity, same thing as the equity, because assets minus liability equal to equity. So what we do is we look at the fair value of net assets. Simply put, we look at our assets from a fair value perspective. We look at our liabilities from a fair value perspective. We take the difference and we find the net asset. Let's assume for a particular company we found that the net asset is $70. So this is how much this company is worth, based on the fair value of the net identifiable assets. And I happen to pay, rather than $100, I wanted to pay $90 for this company. Well, guess what? Here's what I did. I paid $90. I paid $70 for all the net identifiable, all the assets, net assets, fair value, including assets that I identified. They did not have, but I was able to identify and there's some left. What's left is $20. I cannot identify with any particular asset. This asset, I call it goodwill, basically the remaining. Now, why did I pay this $20 extra above and beyond? I don't know. Maybe the location of the company, maybe the reputation of the company, maybe their customer list, maybe I like the management team. I'm not sure, but it's something that I paid for and I cannot identify. I cannot put down on the balance sheet as an asset. Okay, so that's basically the remaining is goodwill. So hopefully, you know what goodwill is. Let's take a look at the question and see if we can answer this question. So on January 1st, 2006, RID Corporation purchased 80% of shots. So we have R&S, $10 per value common stock and we paid $975 on that date. The carrying amount of the Shaw net asset was $1 million. So the book value equal to $1 million. The book value means net assets minus, I'm sorry, assets minus liabilities at book value equal to $1 million. The fair value of Shaw's identifiable assets and liabilities were the same as the carrying amount except for a plant asset which is worth $100,000 in excess of the carrying value. What we're saying is this, the fair value, remember, this is the book value of the net asset. So this is net asset book value. When we look at net asset, fair market value, well, we know we have $100,000 extra, so equal to $1 million. That's the $1 million with the book value plus it seems our assets, our plant asset are under valued, not undervalued, they're reported simply at cost. When we report them at fair market value, it's worth $100,000. Therefore, the net asset fair market value is $1 million, $100,000. Also on this problem, they told you the fair value of the 20% non-controlling interest was properly determined to be $200,000. Now, here they gave you more information than they should, but you want to make sure you understand what you are giving. Here's what we're saying. You bought a company. Here's the company. You purchased 80% of this company and the remaining 20%, obviously you did not buy, you only bought 80%. And what they told you is this. They told you this 20% component is worth $200,000 and you paid $975,000 for the 80%. Well, I can tell you this company is worth those two amounts together, which is $1 million, $1 million, $175,000. So this is the fair value of the company. How did I know this? Look, they already told you the non-controlling interest is $200,000. They already told you you paid $975,000 for 80%. So bear in mind, if they don't give you the non-controlling interest, you have to find out what is the fair value of the company itself. How would you find the fair value of the company itself? Here's what you would do and hopefully you watch that show on CNBC Shark Tank and basically if you paid $975,000 and you paid for 80% for the company. So the company must be worth $1,218,750. That's if you are not giving the non-controlling interest, but they gave you the non-controlling interest. So here, the numbers don't make perfect sense, but hey, this is what you are giving. You'll work with that. Don't assume the fair value is $1,215,000 because they already told you the fair value of the non-controlling interest. Well, then the company is worth, if you paid $975,000, then the company is worth the 80% is $975,000 and the remaining is 20%. Because we assume this is an arm length transaction, you are not told otherwise. So the fair market value of the company is $1,917,000. So the company is worth $1,100,000. The fair market value of the company is worth this much. Of this amount, of this amount, we know we know that $100,000 of this amount is part. Well, let's first, if we take this fair market value, we subtracted from the book value of a million right here. We subtracted from the book value. We know we paid access of $175,000 or the company has a fair market value in access of $175,000. Well, here's what I can do. I would know that we are already told that $100,000 of this access amount is for plant asset. Well, the remaining is $75,000 and they didn't tell us anything about the remaining. Well, if they don't tell us anything, the $75,000 must have been goodwill because I identified $100,000 of the extra value in property, plant, and equipment. The remaining is goodwill because I cannot identify any other asset. I cannot identify any other asset. Another way to look at this, it's better if you look at it this way, but another way to look at this, I mean, always use this method. I just want you to understand that we paid, if we break this company into two components, 80 and 20, 80 and 20, I paid, I just want you to, from an understanding perspective, you paid $975,000 and you paid 80%. The book value of this 80% equal to $800,000. How did I know the book value $800,000 if I take a million? Because the book value is a million. If I multiply, I purchase 80%, I purchase for $800,000. So if I take the difference between my 80% and the book value 80%, there's an access of $175,000. Again, I can break it down $100,000 to the property, plant, and equipment, plant asset and the remaining $75,000 is for my goodwill. Always use this method. I just, I want you to understand that just like from an understanding perspective, just make sure you know that you are buying 80%. You have to value the whole company. The whole company kind of, they gave you the $200,000. You have to be careful because they gave it to you, but if they did not give you the $200,000, then you will have to find out what's the value of the company by using the shark tank technique taking $975 divided by 80% and you will find that the remaining, the company is worth $1,200,000. Let me see. Let's do it again. So this way you can see what I'm doing here. So if I take $975,000 divided by .8, that's the total value of the company. I purchased 80%. I paid $975,000. I just want to show you why did I come up with this number. Although this $1,218,750 is not used here because they made our life easy. How did they make our life easy? Kind of, they make it easy and tricky. Just that's why you have to be very careful. They gave you the fair value of the good world and what you paid is the fair value. Together is the total fair value of the company. Now, so the answer is $75,000. That's simply, that's basically it. Now, what do I offer? Like you looked at this question, you see how I sold it. Like what do I offer? What do Farhat Lectures offer? For example, this consolidation topic is covered in every CPA course I offer, whether it's your taken Becker, Roger, Wiley, Glyme, it doesn't matter. Also, I do have an advanced accounting course where you can learn consolidation from A to Z. Let's assume you went to college long time ago and you forget about consolidation. That's no problem. I can show you consolidation starting from A to Z, from acquisition to post acquisition, how to consolidate the income statement and the balance sheet because the CPA firm, sorry, the CPA prep companies, they don't teach you this. The CPA prep company assumes you know it and they will show you how to complete certain steps in consolidation. I don't assume that I teach you and that's the difference. Or you learned it recently, but you didn't get it properly. Or if you're taken advanced accounting and need supplemental material, this is where I can help you. I mean, I have exercises, I have true, false, multiple choice that's going to help you to prepare for this topic. So when you take your CPA exam, your CPA exam prep course, Wiley or Becker or whatever they're not or listed on this page, you're comfortable with this. You study for your CPA exam once. It's a lifetime investment. Don't shortchange yourself. My fee, my subscription is practically nominal. You are investing in a lifetime career. Take it seriously, study hard, good luck and stay safe.