Question

Problem 3 Avery Company acquired the net assets of Iowa Company on June 1, 20X1. The net assets acquired include plant assets that are provisionally estimated to have a fair value of $410,000 with a 10-year usable life and no salvage value and buildings that are provisionally estimated to have a fair value of $162,000 with a 15-year usable life and salvage value of $18,000. Depreciation is recorded based on months in service. The remaining unallocated amount of the price paid is $62,300, which is recorded as goodwill. At the end of December 20X1, Avery prepared the following statements includes lowa Company for the last seven months): Balance Sheet Current Assets........................ $300,000 Equipment (net).... ... 600,000 Plant assets (net)....... ..... ... 1,194,700 Buildings 643,000 Good will. 62.300 Total assets................ $2,800,000 Current liabilities................... $ 300,000 Bonds payable... 500.000 Common stock ($1 par).......... 50,000 Paid-in Capital in excess of par.....1,300,000 Retained earnings. 650.000 Total liabilities and equity........ $2.800.000 Summary Income Statement $800,000 340.000 $460,000 Sales revenue.... Cost of goods sold................ Gross profit. Operating expenses.......... Depreciation expense.......... Net Income.. $240,000 145.000 385.000 $ 75.000 In March 20X2, the final estimated fair value of the acquired plant assets is $320,000 with no change in the estimate of useful life or salvage value. The final estimated fair value of the acquired buildings is $223,200 with no change in the estimate of useful life or salvage value. 1. Prepare any journal entries required in March 20X2. 2. Prepare the revised balance sheet and income statement for 20X1 that will be included in the 20X2 comparative statements.

Answer 1

As per the given information Avery company acquired the net assets of lowa company on June 1, 2011
The provisional fair market values of net assets of lowa company which are taken in the books of Avery
company are as follows:
Plant assets	410000
Useful life	10
Salvage value	0
Depreciation taken for 7 months from June 01 to December 31	23917
Buildings	162000
Useful life	15
Salvage value	18000
	144000
Annual depreciation	9600
Depreciation taken for 7 months from June 01 to December 31	5600
Goodwill- remain unallocated	62300
So, total amount paid for the net assets of lowa company by Avery company is
Plant assets	410000
Buildings	162000
Goodwill	62300
	634300
March 2012, the final estimated fair value of the above assets are
Plant assets	320000
Buildings	223200
Goodwill(634300-320000-223200)	91100
1. Journal entries in March 2012
Particulars	Dr($)	Cr($)
Goodwill	90000		410000-320000
Plant assets		90000
(Being for the plant assets are decreased)
Buildings	61200		223200-162000
Goodwill		61200
(Being increase in the final estimated building value)
Depreciation	2380
Buildings		2380
Plant assets	5250
Depreciation		5250
Revised depreciation calculation
Plant assets	320000
Useful life	10
Salvage value	0
Depreciation taken for 7 months from June 01 to December 31	18667
Buildings	223200
Useful life	15
Salvage value	18000
	205200
Annual depreciation	13680
Depreciation taken for 7 months from June 01 to December 31	7980
2. Revised Balance sheet and Income statement for 2011
Summary Income statement
	Amount($)
Sales revenue		800000
Cost of goods sold		340000
Gross Profit		460000
Operating expenses	240000
Depreciation expense	142130	382130	(145000-5250+2380)
Net Income		77870
Balance sheet
Current assets	300000	Current liabilities	300000
Equipment(net)	600000	Bonds payable	500000
Plant assets(net)(1194700-90000+5250)	1109950	Common stock ($1 par)	50000
Buildings(643000+61200-2380)	701820	Paid in capital in excess of par	1300000
Goodwill	91100	Retained earnings	652870	(650000-75000+77870)
	2802870		2802870