Question

In a pre-2009 business combination, Acme Company acquired all of Brem Company’s assets and liabilities for cash. After the combination Acme formally dissolved Brem. At the acquisition date, the following book and fair values were available for the Brem Company accounts:

	Book Values			Fair Values
Current assets	$	63,200		$	63,200
Equipment		150,000			216,000
Trademark		0			324,000
Liabilities		(68,200	)		(68,200	)
Common stock		(100,000	)
Retained earnings		(45,000	)

In addition, Acme paid an investment bank $32,100 cash for assistance in arranging the combination.

1. Using the legacy purchase method for pre-2009 business combinations, prepare Acme’s entry to record its acquisition of Brem in its accounting records assuming the following cash amounts of $659,900 and $425,100 were paid to the former owners of Brem.
2. How would these journal entries change if the acquisition occurred post-2009 and therefore Acme applied the acquisition method?

Answer 1

Part a)

When the Cash Amount Paid to Former Owners is $659,900

The journal entry is prepared as below:

Transaction	General Journal	Debit	Credit
1	Current Assets	$63,200
	Equipment	$216,000
	Trademark	$324,000
	Goodwill	$157,000
	Liabilities		$68,200
	Cash (659,900 + 32,100)		$692,000

______

Notes:

The value of goodwill is calculated as below:

Goodwill = (Cash Amount + Acquisition Costs) - (Fair Value of Net Assets Acquired) = (659,900 + 32,100) - (63,200 + 216,000 + 324,000 - 68,200) = $157,000

______

When the Cash Amount Paid to Former Owners is $425,100

The journal entry is prepared as below:

Transaction	General Journal	Debit	Credit
1	Current Assets	$63,200
	Equipment (216,000 - 31,120)	$184,880
	Trademark (324,000 - 46,680)	$277,320
	Liabilities		$68,200
	Cash (425,100 + 32,100)		$457,200

______

Notes:

The value of bargain purchase is calculated as below:

Bargain Purchase = (Cash Amount + Acquisition Costs) - (Fair Value of Net Assets Acquired) = (425,100 + 32,100) - (63,200 + 216,000 + 324,000 - 68,200) = -$77,800

The amount of bargain purchase is allocated to long term assets as follows:

Asset	Fair Value	Weight (A)	Total Amount of Reduction (B)	Asset Reduction (A*B)
Equipment	216,000	40% [216,000/(216,000+324,000)*100]	77,800	$31,120
Trademark	324,000	60% [324,000/(216,000+324,000)*100]	77,800	$46,680

______

Part b)

When the Cash Amount Paid to Former Owners is $659,900

The journal entries are prepared as below:

Transaction	General Journal	Debit	Credit
1	Current Assets	$63,200
	Equipment	$216,000
	Trademark	$324,000
	Goodwill	$124,900
	Liabilities		$68,200
	Cash		$659,900
2	Professional Service Expense	$32,100
	Cash		$32,100

______

Notes:

The value of goodwill is calculated as below:

Goodwill = Consideration Transferred - (Fair Value of Net Assets Acquired) = 659,900 - (63,200 + 216,000 + 324,000 - 68,200) = $124,900

______

When the Cash Amount Paid to Former Owners is $425,100

The journal entries are prepared as below:

Transaction	General Journal	Debit	Credit
1	Current Assets	$63,200
	Equipment	$216,000
	Trademark	$324,000
	Gain on Bargain Purchase		$109,900
	Liabilities		$68,200
	Cash		$425,100
2	Professional Service Expense	$32,100
	Cash		$32,100

______

Notes:

The amount of gain on bargain purchase is arrived as follows:

Gain on Bargain Purchase = Consideration Transferred - (Fair Value of Net Assets Acquired) = 425,100 - (63,200 + 216,000 + 324,000 - 68,200) = -$109,900