Looking at Elan guides pg 153 Example 6 (Acquisition Method), the BV of Long-term Debt was greater than its Fair Value, yet the example deducted from the Excess purchase price the negative difference… Here is the illustration…
BV of LT Debt = 2500 FV of LT Debt = 2000 Difference = -500
BV of Invent. = 1500 FV of Invent. = 3500 Difference = +2000
BV of PP&E = 2800 FV of PP&E = 4000 Difference = +1200
Excess Purchase Price = 8,550,000
Allocated to identif. net assets:
Inventory…2,000,000
PP&E…1,200,000
LT Debt…500,000
Allocated to goodwill…4,850,000
They treat the excess of FV to BV of Inventory and PP&E same as LT Debt, even though they’re not. Am i missing something? Is this a mistake on their part??
If Inventory and PPE go up then goodwill needs to be decreased by that amount inorder for the equation to stay balanced.
Based on the same underlying account equation. If Liabilities goes down then the right side of the equation is smaller than the left side of the equation. In order to bring it back into balance you need to reduce goodwill by the amount you reduced debt.
Probably a basic way to remember how to adjust goodwill by differences in FV And BV for accounts on different sides of the equation
That is OK. Try not to calculate excess purchase proce for each line sparately but instead use excess of FV over Net Assets. You’ll see that, because the accountg equation is Assets - Liabilites = Equity has to be maintained, the mius sign in front of Liabilities makes it still valid, when FV < BV for Debt.