Chapter 1, Problem 1.10.A1P

To determine

Introduction: Acquisition is a corporate term used to represent purchase of another company and gaining the ownership of the company.

To prepare: Acquisition entry (and all necessary entries) in the books of acquiring company along with value analysis.

Answer to Problem 1.10.A1P

Value Analysis

Total Price paid

$270000$

(-) Total fair value of Net Assets $\underset{\_}{\left(249000\right)}$

Goodwill 21000

Journal Entry

  $\begin{array}{l}\text{Account receivable Dr}\text{. 15000}\hfill \\ \text{Inventory Dr}\text{. 40000}\hfill \\ \text{Prepaid Expenses Dr}\text{. 12000}\hfill \\ \begin{array}{l}\text{Building Dr}\text{. 85000}\\ \text{Land Dr}\text{. 40000}\\ \text{Equipments Dr}\text{. 50000}\\ \text{Copyrights Dr}\text{. 26000}\\ \text{Patents Dr}\text{. 12000}\\ \text{Investment Dr}\text{. 33000}\\ \text{Goodwill Dr}\text{. 21000}\\ \text{ To Accounts payable 22000}\\ \text{ To Interest payable 2000}\\ \text{ To long term notes payable 40000}\\ \text{ To Purchase Consideration 270000 }\end{array}\hfill \\ \hfill \\ \hfill \end{array}$

Explanation of Solution

Acquisition is a corporate term to define buying all of another company and gain the ownership of the company.

Identify the acquirer: for acquisition it is very important for acquiree’s to know the acquirer.

Following things should be kept in mind voting rights, large minority interest, governing body of combined entity and terms of exchange.

Determine the acquisition date of the company.

Measures the fair value of acquiree: the fair value of the aquiree as an entity is assumed to be paid by the acquirer. The price includes the contingent consideration, the costs of acquisition are not included in the price of the company acquired and expended.

Record acquiree’s assets and liabilities that are assumed: the fair value of all identifiable assets and liabilities of the acquire are determined and recorded.

Goodwill results when the price paid exceeds the fair value of net assets. Gain results when the price paid is less than the fair value of net assets.

Contingent consideration: contingent consideration is consideration given on the happening or non-happening of event. It is generally added in purchase consideration and increase goodwill.

Calculation

Journal Entry

  $\begin{array}{l}\text{Account receivable Dr}\text{. 15000}\hfill \\ \text{Inventory Dr}\text{. 40000}\hfill \\ \text{Prepaid Expenses Dr}\text{. 12000}\hfill \\ \begin{array}{l}\text{Building Dr}\text{. 85000}\\ \text{Land Dr}\text{. 40000}\\ \text{Equipments Dr}\text{. 50000}\\ \text{Copyrights Dr}\text{. 26000}\\ \text{Patents Dr}\text{. 12000}\\ \text{Investment Dr}\text{. 33000}\\ \text{Goodwill Dr}\text{. 21000}\\ \text{ To Accounts payable 22000}\\ \text{ To Interest payable 2000}\\ \text{ To long term notes payable 40000}\\ \text{ To Purchase Consideration 270000 }\end{array}\hfill \\ \hfill \\ \hfill \end{array}$

  $\begin{array}{l}\text{Total Assets }\\ \begin{array}{l}\text{Accounts Receivables 15000}\hfill \\ \text{Inventory 40000}\hfill \\ \text{Prepaid Expenses 12000}\hfill \\ \begin{array}{l}\text{Building 85000}\\ \text{Land 40000}\\ \text{Equipments 50000}\\ \text{Investment 33000}\\ \text{Patent 12000}\\ \text{Copyright }\underset{\_}{\text{26000}}\\ \text{Total Assets (A) }\underset{\_}{\underset{\_}{\text{313000 }}}\end{array}\hfill \\ \hfill \\ \hfill \end{array}\\ \text{Total Liabilities }\\ \text{Accounts payable 22000}\\ \text{Interest payable 2000}\\ \text{Notes payable }\underset{\_}{\text{40000}}\\ \text{Total Liabilities (B) }\underset{\_}{\underset{\_}{64000}}\\ \text{Total net assets (A-B) =}\underset{\_}{\underset{\_}{249000}}\end{array}$

Value Analysis

Total Price paid     $270000$

(-) Total fair value of Net Assets $\underset{\_}{\left(249000\right)}$

Goodwill     21000