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Sienna Company developed a specialized banking application software program that it licenses to various financial institutions through multiple-year agreements
Sienna Company developed a specialized banking application software program that it licenses to various financial institutions through
multiple-year agreements. On January 1, 2021, these licensing agreements have a fair value of $985,000 and represent Sienna's sole
asset. Although Sienna currently has no liabilities, the company has a $158,000 net operating loss (NOL) carry-forward because of
2.85 recent operating losses.
points
On January 1, 2021, Paoli, Inc., acquired all of Sienna's voting stock for $1,170,000. Paoli expects to extract operating synergies by
integrating Sienna's software into its own products. Paoli also hopes that Sienna will be able to receive a future tax reduction from its
a) NOL. Assume an applicable federal income tax rate of 21 percent.
eBook
a. If there is a greater than 50 percent chance that the subsidiary will be able to utilize the NOL carry-forward, how much goodwill
= should Paoli recognize from the acquisition?
Print b. If there is a less than 50 percent chance that the subsidiary will be able to utilize the NOL carry-forward, how much goodwill should
Paoli recognize from the acquisition?
Expert Solution
a) Computation of Goodwill:
Excess of price paid over fair value of asset acquired = Price paid - Asset fair value
= 1170000 - 985000
= 185,000
Deferred tax asset to be created = NOL * Tax rate = 158000 * 0.21 = 33,180
Goodwill = $185,000 - $33,180 = $151,820
b) Since there are less than 50% to offset this loss (NOL) there will no deferred tax asset created. Accordingly
Goodwill = 185,000
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