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CLEP Financial Accounting Exam Prep

Category - CLEP Financial Accounting Test Practice Questions

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Big Bertha’s Birds decided to purchase Ken’s Canaries. Ken’s Canaries has a book value of $550,000. Big Bertha paid $655,000 in stock and cash under the purchase method. How much goodwill would Big Bertha be required to put on its balance sheet?
  1. $550,000
  2. $655,000
  3. $155,000
  4. $105,000
  5. $100,000
Explanation
Answer - D - The goodwill that Big Bertha’s Birds would recognize on its balance sheet is $105,000.

Key Takeaway: Goodwill is the premium paid above book value for another business. Ken’s Canaries had a book value of $550,000 and the purchase price was $655,000. $655,000 − $550,000 = $105,000.
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