Question
Asset Purchase, Cash LO 6 P Company acquired the assets and assumed the liabilities of S Company on January 1, 2018, for $510,000 when S
Asset Purchase, Cash LO 6 P Company acquired the assets and assumed the liabilities of S Company on January 1, 2018, for $510,000 when S Companys balance sheet was as follows:
Cash Receivables Inventory Land Plant and equipment (net)
Total
$ 96,000 55,200 110,400 169,200 466,800
$897,600
$ 44,400 480,000 120,000 253,200
$897,600
S COMPANY Balance Sheet January 1, 2018
Accounts payable Bonds payable, 10%, due 12/31/2023, Par Common stock, $2 par value Retained earnings
Total
Exercise 2-5
Fair values of S Companys assets and liabilities were equal to their book values except for the following:
-
Inventory has a fair value of $126,000.
-
Land has a fair value of $198,000.
3. The bonds pay interest semiannually on June 30 and December 31. The current yield rate
on bonds of similar risk is 8%.
Required:
Prepare the journal entry on P Companys books to record the acquisition of the assets and assump- tion of the liabilities of S Company.
Asset Purchase, Contingent Consideration as a Liability LO 7 Pritano Company acquired all the net assets of Succo Company on December 31, 2018, for $2,160,000 cash. The balance sheet of Succo Company immediately prior to the acquisition showed:
Book value
Current assets $ 960,000 Plant and equipment 1,080,000
Total $2,040,000
Fair value
$ 960,000
1,440,000 $2,400,000 $ 216,000
Liabilities Common stock Other contributed capital Retained earnings
Total
$ 180,000 480,000 600,000 780,000
$2,040,000
Exercises
69
As part of the negotiations, Pritano agreed to pay the stockholders of Succo $360,000 cash if the post-combination earnings of Pritano averaged $2,160,000 or more per year over the next two years. The estimated fair value of the contingent consideration was $144,000 on the date of the acquisition.
Required:
-
Prepare the journal entries on the books of Pritano to record the acquisition on Decem- ber 31, 2018.
-
At the end of 2019, the estimated fair value of the contingent consideration increased to $200,000. Prepare the journal entry to record the change in the fair value of the contingent consideration, if needed.
-
In 2020, the earnings did not meet the earnout target and the estimated fair value of the contingent consideration was zero. Prepare the journal entry to record the change in the fair value of the contingent consideration.
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