38. On January 1, 20X1, Honey Bee Corporation purchased the net assets of Green Hornet Company for
$1,500,000. On this date, a condensed balance sheet for Green Hornet showed:
Book
Fair
Value
Value
Current Assets
$ 500,000
$800,000
Long-Term Investments in Securities
200,000
150,000
Land
100,000
600,000
Buildings (net)
700,000
900,000
$1,500,000
Current Liabilities
$ 300,000
$300,000
Long-Term Debt
550,000
600,000
Common Stock (no-par)
300,000
Retained Earnings
350,000
$1,500,000
Required:
Record the entry on Honey Bee’s books for the acquisition of Green Hornet’s net assets.
Acquisition price
$1,500,000
Fair value of acquired net assets:
Current assets
$800,000
Long-term investments in securities
150,000
Land
600,000
Buildings
900,000
Current liabilities
(300,000)
Long-term debt
(600,000)
1,550,000
Gain on acquisition of business
$ 50,000
Current Assets
800,000
Long-Term Investments in Securities
150,000
Land
600,000
Building
900,000
Current Liabilities
300,000
Long-Term Debt
600,000
Gain on Acquisition of Business
50,000
Cash
1,500,000
39. Diamond acquired Heart’s net assets. At the time of the acquisition Heart’s Balance sheet was as follows:
Accounts Receivable
$130,000
Inventory
70,000
Equipment, Net
50,000
Building, Net
250,000
Land
100,000
Total Assets
$600,000
Bonds Payable
$100,000
Common Stock
50,000
Retained Earnings
450,000
Total Liabilities and Stockholders’ Equity
$600,000
Fair values on the date of acquisition:
Inventory
$100,000
Equipment
30,000
Building
350,000
Land
120,000
Brand Name
50,000
Bonds payable
120,000
Acquisition costs:
$ 5,000
Required:
Record the entry for the purchase of the net assets of Heart by Diamond at the following cash prices:
$700,000
$300,000
Fair value of acquired net assets:
Accounts receivable
$130,000
Inventory
100,000
Equipment
30,000
Buildings
350,000
Land
120,000
Brand name
50 000
Bonds payable
(120,000)
Total
$660,000
a.
Accounts Receivable
130,000
Inventory
100,000
Equipment
30,000
Building
350,000
Land
120,000
Brand Name
50,000
Goodwill ($700,000 – $660,000)
40,000
Acquisition Expenses
5,000
40. On January 1, July 1, and December 31, 20X5, a condensed trial balance for Nelson Company showed the
following debits and (credits):
01/01/X5
07/01/X5
12/31/X5
Current Assets
$200,000
$260,000
$340,000
Plant and Equipment (net)
500,000
510,000
510,000
Current Liabilities
(50,000)
(70,000)
(60,000)
Long-Term Debt
(100,000)
(100,000)
(100,000)
Common Stock
(150,000)
(150,000)
(150,000)
Other Paid-in Capital
(100,000)
(100,000)
(100,000)
Retained Earnings, January 1
(300,000)
(300,000)
(300,000)
Dividends Declared
10,000
Revenues
(400,000)
(900,000)
Expenses
350,000
750,000
Assume that, on July 1, 20X5, Systems Corporation purchased the net assets of Nelson Company for $750,000 in cash. On this date, the fair values
for certain net assets were:
Current Assets
$280,000
Plant and Equipment (remaining life of 10 years)
600,000
Nelson Company’s books were NOT closed on June 30, 20X5.
For all of 20X5, Systems’ revenues and expenses were $1,500,000 and $1,200,000, respectively.
Required:
(1)
Record the entry on Systems’ books for the July 1, 20X5 purchase of Nelson.
1.
Debit
Credit
Current Assets
280,000
Plant and Equipment
600,000
Goodwill *
40,000
Current Liabilities
70,000
Long-Term Debt
100,000
Cash
750,000
Acquisition price
$750,000
Fair value of acquired net assets:
Current assets
$280,000
Plant and equipment
600,000
Current liabilities
(70,000)
Long-term debt
(100,000)
710,000
Goodwill
$ 40,000
41. On January 1, 20X3 the fair values of Pink Coral’s net assets were as follows:
Current Assets
100,000
Equipment
150,000
Land
50,000
Buildings
300,000
Liabilities
80,000
On January 1, 20X3, Blue Reef Company purchased the net assets of the Pink Coral Company by issuing 100,000 shares of its $1 par value stock
when the fair value of the stock was $6.20. It was further agreed that Blue Reef would pay an additional amount on January 1, 20X5, if the average
income during the 2-year period of 20X3-20X4 exceeded $80,000 per year. The expected value of this consideration was calculated as $184,000; the
measurement period is one year. Blue Reef paid $15,000 in professional fees to negotiate the purchase and construct the acquisition agreement and
$10,000 in stock issuance costs.
Required: Prepare Blue Reef’s entries:
a) on January 1, 20X3 to record the acquisition
b) on August 1, 20X3 to revise the contingent consideration to $170,000
c) on January 1, 20X5 to settle the contingent consideration clause of the agreement for $175,000
Current Assets
100,000
Equipment
150,000
Land
50,000
Buildings
300,000
Goodwill *
284,000
Liabilities
80,000
Estimated Liability for Contingent Consideration
184,000
Common stock, $1 Par ($1 x 100,000 shares)
100,000
Paid-in Capital in Excess of Par ($620,000 – $100,000)
520,000
Acquisition Expense
15,000
Paid-in Capital in Excess of Par **
10,000
Cash
25,000
Acquisition price:
Fair value of common stock issued ($6.20 x 100,000 shares)
$620,000
Contingent consideration
184,000
804,000
Fair value of acquired net assets:
Current assets
$100,000
Equipment
150,000
Land
50,000
Buildings
300,000
Liabilities
( 80,000)
520,000
Goodwill
$ 284,000
b.
Estimated Liability for Contingent Consideration
14,000
Goodwill
14,000
42. The Blue Reef Company purchased the net assets of the Pink Coral Company on January 1, 20X1, and made
the following entry to record the purchase:
Current Assets
100,000
Equipment
150,000
Land
50,000
Buildings
300,000
Goodwill
100,000
Liabilities
80,000
Common Stock, $1 Par
100,000
Paid-in Capital in Excess of Par
520,000
Required:
Make the required entry on January 1, 20X3, assuming that additional shares would be issued on that date to compensate for any fall in the value of
Blue Reef common stock below $16 per share. The settlement would be to cure the deficiency by issuing added shares based on their fair value on
January 1, 20X3. The fair price of the shares on January 1, 20X3 was $10.
Paid-in Capital in Excess of Par
60,000
Common Stock, $1 par
60,000
Deficiency: ($16 – $10) ´ 100,000 shares issued to acquire
$600,000
Added number of shares to issue
60,000
Estimated Liability for Contingent Consideration
170,000
Loss on Estimated Contingent Consideration
5,000
Cash
175,000
43. Poplar Corp. acquires the net assets of Sapling Company, which has the following balance sheet:
Accounts Receivable
$ 50,000
Inventory
80,000
Equipment, Net
50,000
Land & Building, Net
120,000
Total Assets
$300,000
Bonds Payable
$ 90,000
Common Stock
100,000
Retained Earnings
110,000
Total Liabilities and Stockholders’ Equity
$300,000
Fair values on the date of acquisition:
Accounts receivable
$ 50,000
Inventory
100,000
Equipment
30,000
Land and building
180,000
Customer list
30,000
Bonds payable
100,000
Acquisition costs:
$ 10,000
If Poplar paid $300,000 what journal entries would be recorded by both Poplar Corp. and Sapling Company?
Accounts Receivable
50,000
Inventory
100,000
Equipment
30,000
Land & Building
180,000
Customer List
30,000
Goodwill ($300,000 – $290,000)
10,000
Acquisition Expenses
10,000
Bonds Payable
90,000
Premium on Bonds Payable
10,000
Cash ($300,000 + $10,000)
310,000
Fair value of acquired net assets:
Accounts receivable
$ 50,000
Inventory
100,000
Equipment
30,000
Land and building
180,000
Customer list
30,000
Liabilities
(100,000)
$290,000
Cash
300,000
Bonds Payable
90,000
Accounts Receivable
50,000
44. The Chan Corporation purchased the net assets (existing liabilities were assumed) of the Don Company for
$900,000 cash. The balance sheet for the Don Company on the date of acquisition showed the following:
Assets
Current assets
$100,000
Equipment
300,000
Accumulated depreciation
(100,000)
Plant
600,000
Accumulated depreciation
(250,000)
Total
$650,000
Liabilities and Equity
Bonds payable, 8%
$200,000
Common stock, $1 par
100,000
Paid-in capital in excess of par
200,000
Retained earnings
150,000
Total
$650,000
Required:
The equipment has a fair value of $300,000, and the plant assets have a fair value of $500,000. Assume that the Chan Corporation has an effective
tax rate of 40%. Prepare the entry to record the purchase of the Don Company for each of the following separate cases with specific added
information:
The sale is a nontaxable exchange to the seller that limits the buyer to depreciation and amortization on only book value for tax purposes.
The bonds have a current fair value of $190,000. The transaction is a taxable exchange.
There are $100,000 of prior-year losses that can be used to claim a tax refund. The transaction is a taxable exchange.
There are $150,000 of past losses that can be carried forward to future years to offset taxes that will be due. The transaction is a taxable
exchange.
Current Assets
100,000
Equipment
300,000
Plant
500,000
Goodwill
300,000
Deferred Tax Liability*
100,000
Bonds Payable
200,000
Cash
900,000
* 40% ´ ($800,000 Fair Value $550,000 Book Value of fixed assets)
b.
Current Assets
100,000
Equipment
300,000
Plant
500,000
Goodwill
190,000
Bonds Payable
190,000
Cash
900,000
45. While acquisitions are often friendly, there are numerous occasions when a party does not want to be
acquired. Discuss possible defensive strategies that firms can implement to fend off a hostile takeover attempt.
Equipment
300,000
Tax Refund Receivable ($100,000 x 40%)
40,000
Bonds Payable
200,000
Equipment
300,000
Deferred Tax Asset ($150,000 ´ 40%)
60,000
Bonds Payable
200,000
46. Goodwill is an intangible asset. There are a variety of recommendations about how intangible assets should
be included in the financial statements. Discuss the recommendations for proper disclosure of goodwill. Include
a comparison with disclosure of other intangible assets.
Goodwill arises when a company is purchased and the value assigned to identifiable assets, including intangible
assets, is in excess of the price paid. As such goodwill represents the value of intangible assets that could not be
valued individually.
During a purchase some intangible assets such as patents, customer lists, brand names, and favorable lease
agreements may exist but have not been recorded. The fair value of these intangible assets should be determined
and recorded separate from the value of goodwill associated with the purchase.
Intangible assets other than goodwill will be amortized over their economic lives. The amortization method
should reflect the pattern of benefits conveyed by the asset, so that a straight-line method is to be used unless
another systematic method is appropriate.
Intangible assets may be reported individually, in groups, or in the aggregate on the balance sheet after fixed
assets and are displayed net of cumulative amortization. Details for current and cumulative amortization, along
with significant residual values, are shown in the footnotes to the balance sheet.
Goodwill is subject to impairment procedures. These concerns must be addressed related to goodwill: