Asume that an asset that was remeasured through a proforma journal (fair value adjustment) at acquisition is subsequently sold. How would the goodwill calculation (for the business combination) be impacted by the subsequent sale of this remeasured asset?
Select one:
a. Goodwill will increase
b. Goodwill will decrease
c. Goodwill remains unchanged
d. Goodwill will be eliminated
The correct answer and explanation is:
The correct answer is b. Goodwill will decrease.
When an asset is remeasured at fair value during the acquisition of a business, the new fair value is recorded in the books. The fair value adjustment is typically part of the purchase price allocation process, and it impacts the calculation of goodwill.
Goodwill is calculated as the difference between the purchase price of the acquired business and the fair value of its identifiable assets and liabilities. This fair value includes the adjusted values of any assets that were remeasured during the acquisition process. Therefore, any subsequent sale of a remeasured asset has the potential to impact goodwill.
If the asset that was remeasured at fair value during acquisition is later sold, the sale is considered a realization of the fair value adjustment. The gain or loss from this sale is recognized in the income statement and reduces the net book value of the business. This reduction in the overall value of the acquired assets decreases the overall excess of the purchase price over the fair value of identifiable assets, which in turn reduces the amount of goodwill.
To summarize, when a remeasured asset is sold, the adjustment reduces the carrying value of the acquired business, thereby decreasing the goodwill that was originally recognized at the time of acquisition. This is because the asset’s sale reflects a change in the underlying value of the assets, leading to a decrease in the overall goodwill amount.