Homework Answers
a.Consideration $291,000
| Event | Accounts | Debit | Credit |
| 1 | Common Stock | $86,000 | |
| Retained Earnings | $189,000 | ||
| Good Will A/c | $16,000 | ||
| To Investment in Scrub Company | $291,000 | ||
| (Elimination of Investment and stockholder equity) |
When Net Consideration is more than the net asset value (Stockholder Equity), then the difference is to be transferred to GoodWill.
| Calculation | ||
| Net Consideration for acquisition | $291,000 | |
| Net Asset Value of Scrub Company | ||
| Assets | $447,000 | |
| Less: liabilities | $172,000 | |
| Net Asset Value of Scrub Company | $275,000 | |
| Goodwill to be recognised | $16,000 | |
| Retained Earnings Balance | ||
| Book Value | $180,000 | |
| Add: Increase in Value of land | $17,000 | |
| less: Decrease in value of inventory | $8,000 | |
| Fair Value (to be eliminated) | $189,000 | |
| Note: Change in Fair Value of Assets to be transferred to Retained Earnings |
b. Consideration $262,000
| Event | Accounts | Debit | Credit |
| 1 | Common Stock | $86,000 | |
| Retained Earnings | $189,000 | ||
| To Investment in Scrub Company | $262,000 | ||
| To Capital Reserve A/c | $13,000 | ||
| (Elimination of Investment and stockholder equity) |
When Net Consideration is less than the net asset value (Stockholders'Equity), then the difference is to be transferred to Capital reserve.
| Calculation | ||
| Net Consideration for acquisition | $262,000 | |
| Net Asset Value of Scrub Company | ||
| Assets | $447,000 | |
| Less: liabilities | $172,000 | |
| Net Asset Value of Scrub Company | $275,000 | |
| Capital reserve to be recognised | $13,000 | |
| Retained Earnings Balance | ||
| Book Value | $180,000 | |
| Add: Increase in Value of land | $17,000 | |
| less: Decrease in value of inventory | $8,000 | |
| Fair Value (to be eliminated) | $189,000 | |
| Change in Fair Value of Assets to be transferred to Retained Earnings |
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