Question
Hamilton Companys balance sheet on January 1, 2019, was as follows: Hamilton Company Balance Sheet January 1, 2019 1 Cash $30,000.00 Accounts payable $20,000.00 2
Hamilton Companys balance sheet on January 1, 2019, was as follows:
Hamilton Company |
Balance Sheet |
January 1, 2019 |
1 | Cash | $30,000.00 | Accounts payable | $20,000.00 |
2 | Accounts receivable | 80,000.00 | Bonds payable | 120,000.00 |
3 | Marketable securities (short-term) | 40,000.00 | Pension liability | 50,000.00 |
4 | Inventory | 100,000.00 | Common stock | 200,000.00 |
5 | Property, plant, and equipment (net) | 200,000.00 | Retained earnings | 60,000.00 |
6 |
| $450,000.00 |
| $450,000.00 |
Korbel Company is considering purchasing Hamilton (a privately held company) and discovers the following about Hamilton:
a. | No allowance for doubtful accounts has been established. A $10,000 allowance is considered appropriate. |
b. | Marketable securities are valued at cost. The current market value is $60,000. |
c. | The LIFO inventory method is used. The FIFO inventory of $140,000 would be used if the company is acquired. |
d. | Land, included in property, plant, and equipment, which is recorded at its cost of $50,000, is worth $120,000. The remaining property, plant, and equipment is worth 10% more than its depreciated cost. |
e. | The company has an unrecorded trademark that is worth $70,000. |
f. | The companys bonds are currently trading for $130,000. |
g. | The pension liability is understated by $40,000. |
Required:
1. | Compute the amount of goodwill if Korbel agrees to pay $500,000 cash for Hamilton. |
2. | Next Level What are the reasons that the book value of Hamiltons net identifiable assets differ from their market value? |
3. | Prepare the journal entry to record the acquisition on the books of Korbel assuming Hamilton is liquidated. |
4. | If Korbel agrees to pay only $400,000 cash, how much goodwill exists? |
5. | If Korbel pays only $400,000 cash, prepare the journal entry to record the acquisition on its books, assuming Hamilton is liquidated. |
Chart of Accounts
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Hamilton Company | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
General Ledger | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Goodwill
Shaded cells have feedback.
1. Compute the amount of goodwill if Korbel agrees to pay $500,000 cash for Hamilton.
Points:
0 / 1
Feedback
Check My Work
When a company is purchased by another company, previously developed but unrecognized goodwill can be separately identified and recognized by the acquirer. The purchased goodwill is the difference between the purchase price of the acquired company and the fair value of its identifiable net assets. Goodwill is recorded as an asset by the acquiring company because a transaction has occurred and the exchange price allows for a faithful representation of the value of the goodwill. Therefore, goodwill is a residual value determined only after an acquisition and only after the acquired company's other assets and liabilities are identified and measured. Goodwill is considered to have an indefinite life, and, therefore, it is not amortized.
4. If Korbel agrees to pay only $400,000 cash, how much goodwill exists?
none
$15,000
$85,000
$100,000
Points:
0 / 1
Next Level
Shaded cells have feedback.
2. Which of the following are reasons that the book value of Hamilton's net identifiable assets differ from their market value?
I. | An unidentifiable intangible asset (goodwill) exists and is not reported on Hamilton's books. |
II. | Hamilton's inventory is valued using LIFO, which is different from its value under FIFO. |
III. | Hamilton has a valuable internally developed trademark that is not recorded. |
Points:
0 / 1
General Journal
Shaded cells have feedback.
3. Prepare the journal entry to record the acquisition of Hamilton by Korbel Company on January 1, 2019. Assume Korbel pays $500,000 cash and Hamilton is liquidated.
General Journal Instructions
All transactions on this page must be entered (except for post ref(s)) before you will receive Check My Work feedback.
PAGE 1
GENERAL JOURNAL
Score: 104/145
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Points:
17.93 / 25
Feedback
Check My Work
When a company is purchased by another company, previously developed but unrecognized goodwill can be separately identified and recognized by the acquirer. The purchased goodwill is the difference between the purchase price of the acquired company and the fair value of its identifiable net assets.
5. Prepare the journal entry to record the acquisition of Hamilton by Korbel Company on January 1, 2019. Assume Korbel pays $400,000 cash and Hamilton is liquidated.
General Journal Instructions
All transactions on this page must be entered (except for post ref(s)) before you will receive Check My Work feedback.
PAGE 1
GENERAL JOURNAL
Score: 104/145
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