Question

EXERCISE 2‐1 Asset Purchase LO 6 Preston Company acquired the assets (except for cash) and assumed the liabilities of Saville Company. Immediately prior to the acquisition, Saville Company's balance sheet was as follows: Book Value Fair Value Cash $ 120,000 $ 120,000 Receivables (net) 192,000 228,000 Inventory 360,000 396,000 Plant and equipment (net) 480,000 540,000 Land     420,000     660,000  Total assets $ 1,572,000 $ 1,944,000 Liabilities $ 540,000 $ 594,000 Common stock ($ 5 par value) 480,000 Other contributed capital 132,000 Retained earnings    420,000  Total equities $ 1,572,000 Required: Prepare the journal entries on the books of Preston Company to record the purchase of the assets and assumption of the liabilities of Saville Company if the amount paid was $1,560,000 in cash. Repeat the requirement in (A) assuming that the amount paid was $990,000.

Answer 1

Price paid for acquision		$        1,560,000
Less: Fair value of net assets
Fair value of assets except cash (1944000-120000)	$        1,824,000
Less: Fair value of liabilities	$            594,000
Fair value of net assets		$        1,230,000
Goodwill		$            330,000
Account titles	Debit	Credit
Receivables (net)	$            228,000
Inventory	$            396,000
Plant and equipment (net)	$            540,000
Land	$            660,000
Goodwill	$            330,000
Liabilities		$            594,000
Cash		$        1,560,000
To record the purchase of the assets and assumption of the liabilities of Saville Company if the amount paid was $1,560,000 in cash.

Price paid for acquision		$            990,000
Less: Fair value of net assets
Fair value of assets except cash (1944000-120000)	$        1,824,000
Less: Fair value of liabilities	$            594,000
Fair value of net assets		$        1,230,000
Goodwill (Bargain purchase)		$         (240,000)
Account titles	Debit	Credit
Receivables (net)	$            228,000
Inventory	$            396,000
Plant and equipment (net)	$            540,000
Land	$            660,000
Liabilities		$            594,000
Cash		$            990,000
Gain on acquisition		$            240,000
To record the purchase of the assets and assumption of the liabilities of Saville Company if the amount paid was $990,000 in cash.