Fontana Company developed a specialized banking application software program that it licenses to various financial institutions through multiple-year agreements. On January 1, 2011, these licensing agreements have a fair value of $750,000 and represent Fontana's sole asset. Although Fontana currently has no liabilities, because of recent operating losses, the company has a $120,000 net operating loss (NOL) carryforward.
On January 1, 2011, Catalan, Inc., acquired all of Fontana's voting stock for $900,000. Catalan expects to extract operating synergies by integrating Fontana's software into its own products. Catalan also hopes that Fontana will be able to receive a future tax reduction from its NOL. Assume an applicable federal income tax rate of 35 percent.
(a) If there is a greater than 50 percent chance that the subsidiary will be able to utilize the NOL carryforward, how much goodwill should Catalan recognize from the acquisition?
(b) If there is a less than 50 percent chance that the subsidiary will be able to utilize the NOL carryforward, how much goodwill should Catalan recognize from the acquisition?