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CASE BNet Company wants to expand its operations and plans to acquire Compusport a company that complements its operations on 31 December 2020. In what

CASE

BNet Company wants to expand its operations and plans to acquire Compusport a company that complements its operations on 31 December 2020. In what follows you can find the accounts reported by both companies on that date. In addition the estimated fair values of Compusports assets and liabilities are included.

BNet Company

Compusport

Book Values

December 31

Book Values

December 31

Fair Values

December 31

Current assets

$1,100,000

$300,000

$300,000

Computers and equipment (net)

1,300,000

400,000

600,000

Capitalized software (net)

500,000

100,000

1,200,000

Customer contracts

-0-

-0-

700,000

Notes payable

300,000

200,000

250,000

Net assets

$2,600,000

$600,000

$2,550,000

Common stock -$10 par value

$1,600,000

Common stock - $5 par value

$100,000

Additional paid-in capital

40,000

20,000

Retained earnings, 1/1

870,000

370,000

Dividends paid

110,000

10,000

Revenues

1,000,000

500,000

Expenses

800,000

380,000

Owners equity 12/31

$2,600,000

$600,000

Retained earnings, 12/31

960,000

480,000

Additional information:

1. BNet acquires Compusport on 31 December 2020 by issuing 26,000 shares of $10 par value common stock valued at $100 per share.

2. In creating this combination, BNet pays legal and accounting fees of $40,000 for a third party for their assistance in arranging the transaction.

3. BNet promises to pay an additional $83,200 to the former owners if Compusport generates earnings in excess of $300,000 during the next annual period. BNet estimates a 25% probability that the $83,200 contingent payment will be required. A discount rate of 4% to represent the time value of money is applied. The fair value approach of the acquisition method views such contingent payments as part of the consideration transferred.

Required:

Assuming that BNet will retain separate legal incorporation and maintain its own accounting systems.

1. Calculate the fair value of the consideration transferred to invest in Compusport.

2. Prepare the journal entry for BNet to record its investment in Compusport using the acquisition

method.

3. Determine the fair value in excess of book value for BNet's acquisition date investment in Compusport.

4. Prepare a worksheet to consolidate the accounts of the two companies.

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