Question

2 Fred Moss, owner of Moss Interiors is negotiation for the purchase of Zweifel Galleries. The following balance sheet of Zweifel is gien in an abbreviated form te Moss for zweifel sells $ 350,000 ZWEIFEL GALLERIES Balance Sheet As of December 31, 2017 Assets: Cash Land Buildings (net) Equipment (net) Copyrights (net) Total Assets Liabilities & Stockholders Equity Accounts Payable Notes Payable (L/T) Total Liabilities Common Stock Retained Earnings Total Liabilities & Stockholders Equity 100,000 70,000 200,000 175,000 30,000 575,000 50,000 300,000 350,000 200,000 25,000 225,000 575,000 Moss and Zweifel agree that: 1. Land is undervalued by $30,000 2. Equipment is overvalued by $5,000 Instructions Prepare the entry to record the purchase of Zweifel Galleries on Moss's Books

Answer 1

In the books of acquirer, the assets will be taken over at the revised value. If the purchase consideration is higher than the net assets acquired, then the difference will be debited to Goodwill Account and if the purchase consideration is lower than the net assets acquired then the difference will be credited to gain on acquisition.

In this case, the land is undervalued by $30,000, so land will be taken over at $100,000 (70,000+30,000). The equipment is overvalued by $5,000, so it will be taken over at $170,000 (175,000-5,000).

If we consider this revised values, the net assets are $250,000 (Assets - liabilities). The purchase consideration is $350,000. So, there will be difference of $100,000 which will be debited to Goodwill.

The journal entry to record the purchase of Zweifel Galleries is as below:

Credit ($) Journal entry in the books of Moss Interiors Date Particulars 31/12/2017|Cash ---------------- Dr Land ----------------- Dr Building ------------- Dr Equipment ----------- Dr Copyright ------------ Dr Goodwill ----------- Dr To, Accounts payable To, Notes payable To, Business purchase (Being business purchase recorded) Total Debit ($) 100,000 100,000 200,000 170,000 30,000 100,000 50,000 300,000 350,000 700,000 700,000