Question

On January 1, yearl, Mustang Company purchased all of the stock of MSU Company for $420,000. MSU's balance sheet at the date of purchase follows: Assets Current assets .............. Buildings (net) .............. Equipment (net) ................. Total assets......... $165,000 140,000 100,000 $405,000 Liabilities and Equity Liabilities ...... Common stock ($10 par).......... Retained earnings .... ......... Total liabilities and equity...... $ 65,000 100,000 240,000 $405,000 MSU's equipment was understated by $50,000 and had a 5-year remaining life. All other book values approximate fair values. Any remaining excess is attributed to goodwill. $500 10.000 A. Determine the allocation of the cost B. Prepare Mustang's entry to record its acquisition C. Prepare worksheet entries A and E for the end of 1. year 1 and 2. year 2

Answer 1

A. Allocation of cost of 420,000 $ paid to acquire MSU Company is as follows :

Cost allocated to Identifiable Net Assets (Assets - Liabilities) = 390,000 $ (Refer Note 1)

Cost allocated to Goodwill : 30,000 $

Note 1 : Calculation of cost allocable to Net Assets

Particulars	Amount ($)
Current Assets	1,65,000
Buildings	1,40,000
Equipment	1,50,000	(At FV)
Less : Liabilities	-65,000
Total	3,90,000

B. Entry to record the acquisition

S. No.	Account	Dr. ($)	Cr. ($)
1	Business Purchase a/c .. Dr	4,20,000
	To Vendor a/c (MSU Company)		4,20,000
2	Current Assets a/c ..Dr	1,65,000
	Buildings a/c ..Dr	1,40,000
	Equipment a/c ..Dr	1,50,000
	Goodwill a/c ..Dr	30,000
	To Business Purchase a/c		4,20,000
	To Liabilities a/c		65,000
3	Vendor a/c (MSU Company) .. Dr	4,20,000
	To Cash a/c		4,20,000

C. Worksheet Entries

Note : Information seems to be missing for the C part in question as to which entries are required or what do "A and E" indicate but since only information given in question to which these entries could relate to is the 5 year life for the equipment. Hence we have shown entries for treatment of such equipment below :

Journal entry at end of Year 1 & Year 2 :

S. No.	Account	Dr. ($)	Cr. ($)
Year 1	Depreciation a/c ..Dr	30,000
	To Equipment a/c		30,000
S. No.	Account	Dr. ($)	Cr. ($)
Year 2	Depreciation a/c ..Dr	30,000
	To Equipment a/c		30,000
Depreciation = Cost / Useful life = 150,000/5 years = 30,000 $ per year