Purchase Price Allocation: Goodwill

In acquisition accounting, purchase price allocation is a practice in which an acquirer allocates the purchase price into the assets and liabilities of the target company acquired in the transaction.

All right we’re back up in the assumptions section of the model and if you recall in the assumptions section we finished everything except the goodwill and purchase price allocation now that we’ve put in the historical balance sheet we can calculate this first we’re gonna do some linking of book value items so for cash we’re gonna go down to the balance sheet and

We’re gonna take the cash balance from there then we’re gonna link the accounts receivable balance next is inventory as you can see we’re just going down the balance sheet and grabbing all the assets next is property plant and equipment there is no existing goodwill for this company and there are no intangibles but if there were intangibles that would go there so

The identifiable assets then is this number right here 88 million now that we have the book value here we need to input the fair market value of these assets as they are presently for cash we’re gonna set it equal to book value because there’s no adjustment required for cash of course and then on these other items we’re gonna have to go to the raw data file for the

Case study and get these fair values here so these were provided for us these we’re gonna take as given that these assets were valued and and we can take these as as being given so you can see that accounts receivable was actually reduced a bit sort of sort of written down a little bit perhaps due to some doubtful accounts inventory perhaps there was some older

Aged inventory and so the market value was reduced but on the property plant and equipment side you can see that the value perhaps of some of the land or other assets has actually increased and we’re gonna mark it up so there we have the total and identifiable intangibles is zero since the company has no intangibles so we can sum that up and now we can calculate

The adjustment so the adjustment is simply going to be the fair value minus the book value remember this is the amount that we need to adjust any of the assets by to calculate goodwill let’s paste that down as a formula and then we can fill the sum formula to the right with ctrl r and we have the total adjustments so these total adjustments are going to change

The balance sheet we’re actually going to create an account for a goodwill here and drive the closing balance sheet for this transaction so let’s move over now to the purchase price allocation and we can calculate those values now okay so we closed the raw data file since we don’t need that information anymore let’s fill in this purchase price allocation table now

Let’s start by bringing forward the total purchase price so the total purchase price we can just scroll up and grab right here the total purchase price is this total consideration let’s add to that any stock consideration that might be included so we get 190 million the net book value of assets we can calculate straight from the balance sheet by taking the total

Assets and subtracting the total liabilities so what we’ve got here is the total purchase price which is an equity value for the business and then we’ve got the net book value of assets which is also an equity value of the business so what we’re saying is if the book value of the business is 69 million and the price we paid for the business is 190 there’s obviously

This excess purchase price so we can take the actual purchase price deduct the book value and we get this excess here and that’s what’s going to drive the goodwill calculation so we can just type a 0 here for existing goodwill since there is no existing goodwill and then we can link here the fair value adjustments to the identifiable assets and then what we can

Calculate below is the excess purchase price after adjustments that’s going to be equal to the excess purchase price minus the removal of any existing that will minus any fair value adjustments so we get 1/12 649 here and then that is equal to the goodwill so that’s what’s going to go on the balance sheet now as goodwill for this business one last finishing touch

That we can do here is if we scroll up in the assumptions we wanted to make these dynamic instead of being a hard-coded so we’re gonna link retail cows debt to its balance sheet now that we have that here so let’s make sure we pick up any short-term debt and any long-term debt so we’ve done that and then let’s link the cash to the balance sheet as well that way

There’s only one place we have to make changes and everything will flow through and then we can unhighlight those and leave them as black since they’re formulas so now the assumptions section is 100% complete

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Purchase Price Allocation: Goodwill By Corporate Finance Institute