Exercise 2‐5 Asset Purchase, Contingent Consideration as a Liability LO 7 Pritano Company acquired all the...
Exercise 2‐5 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 Fair value Current assets $ 960,000 $ 960,000 Plant and equipment 1,080,000 1,440,000 Total $2,040,000 $2,400,000 Liabilities $ 180,000 $ 216,000 Common stock 480,000 Other contributed capital 600,000 Retained earnings 780,000 Total $2,040,000 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 December 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.
Homework Answers
Answer:
The journal entries are as follows:
| S.No. | Account Titles | Debit | Credit |
| Part A) | Current Assets | $960,000 | |
| Plant and Equipment | $1,440,000 | ||
| Goodwill (2,160,000 + 216,000 + 144,000 – 960,000 – 1,440,000) | $120,000 | ||
| Liabilities | $216,000 | ||
| Cash | $2,160,000 | ||
| Liability for Contingent Consideration | $144,000 | ||
| (To record acquisition on Dec. 31, 2018) | |||
| Part B) | Loss on Change in Fair Value of Contingent Consideration (200,000 – 144,000) | $56,000 | |
| Liability for Contingent Consideration | $56,000 | ||
| (To record change in the fair value of contingent consideration) | |||
| Part C) | Liability for Contingent Consideration | $200,000 | |
| Gain on Change in Fair Value of Contingent Consideration | $200,000 | ||
| (To record gain from change in the fair value of contingent consideration) |
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Exercise 2‐5 Asset Purchase, Contingent Consideration as a
Liability LO 7 Pritano Company acquired all the...
Pritano Company acquired all the net assets of Succo Company on December 31, 2018, for $2,160,000...
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 Fair value Current assets $ 960,000 $ 960,000 Plant and equipment 1,080,000 1,440,000 Total $2,040,000 $2,400,000 Liabilities $ 180,000 $ 216,000 Common stock 480,000 Other contributed capital 600,000 Retained earnings 780,000 Total $2,040,000 As part of the negotiations, Pritano agreed to pay the stockholders of Succo $360,000 cash if...
Pritano Company acquired all the net assets of Succo Company on December 31, 2020 for $2,160,000...
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