Multiplex purchased 100 percent of the outstanding common stock of Lipley Company for $900,000. At the time of the acquisition, the fair market values of Lipley’s individual assets and liabilities follow:
Cash..........$ 90,000
Accounts receivable..........60,000
Inventory..........160,000
Plant and equipment.....560,000
Payables.........300,000
a. Provide the journal entry recorded by Multiplex at the time of the acquisition.
b. Assume that the book values of the assets and liabilities on Lipley’s balance cheet as of the date of the acquisition were $550,000 and $300,000, respectively. Explain how the book value of Lipley could be less than the net FMV of Lipley’s assets and liabilities, which in turn is less than the price Multiplex paid for Liple’s common stock.