Question

Pure Water Systems Inc. (PWS) is a Canadian public company. On December 31, 2018, PWS acquired common shares of Sweet Water Corp. (SWC). Below are three independent questions based on different scenarios for the number of shares acquired and how the shares are acquired. All the scenarios share the same initial financial data. SWC's comparative statement of financial position as at December 31, 2019, and its statement of comprehensive income for the year ended December 31, 2019 are as follows: Sweet Water Corp. Statement of financial position As at December 31 (in '000s) 2019 2018 Cash $ 479 $ 185 Accounts & other receivables 635 Inventory 460 345 Note receivable 100 0 Land 450 500 Building (net) 294 310 Equipment (net) 478 420 Patent 80 100 Total assets $2.976 $2.380 Accounts payable & accrued liabilities $ 480 $ 460 Long-term debt 900 Common shares 500 500 Retained earnings 1,096 520 Total liabilities and equity $2.976 $2.380 520 900 Sweet Water Corp. Statement of comprehensive income For the year ended December 31, 2019 (in '000s) Sales revenue Cost of goods sold Gross profit Sales, general and admin expenses Interest expense Depreciation and amortization expense $3,160 1.208 1,952 626 45 68 1213 Other income Earnings before income tax expense Income tax expense Net income 1.293 517 $ 776

Answer 1

Answer #1

(a) Calculation and allocation of acquisition differential.

Purchase Consideration paid by PWS to SWC for business purchase = $1,300,000

Fair Value of net assets taken over by PWS from SWC = $1,145,000

1. Cash = $185,000
2. Accounts and other receivables = $520,000
3. Inventory = $315,000
4. Land = $525,000
5. Building = $380,000
6. Equipment = $390,000
7. Patent = $200,000

Total Assets    = $2,515,000

1. Accounts payable and accrued liabilities = $460,000
2. Long Term Debt = $910,000

Total Liabilities = $1,370,000

Net Assets ($2,515,000 - $1,370,000) = $1,145,000

Goodwill paid by PWS to SWC (acquisition differential)       = $155,000

(b) PWS's journal entries to record the acquisition of SWC   

1. Due entry for business acquired for which purchase consideration is payable to liquidator of SWC

Business purchase A/c Dr. $1,300,000

To Liquidator of SWC A/c $1,300,000

2. Incorporation of assets and liabilities taken over

Cash A/c Dr.   $185,000

Accounts and other receivables A/c Dr. $520,000

Inventory A/c Dr.   $315,000

Land A/c Dr. $525,000

Building A/c Dr. $380,000

Equipment A/c Dr. $390,000

Patent A/c Dr. $200,000

Goodwill A/c Dr. $155,000

To Accounts payable and accrued liabilities A/c      $460,000

To Long Term Debt A/c $910,000

To Business Purchase A/c $1,300,000

3. Discharge of purchase consideration

Liquidator of SWC A/c Dr. $1,300,000

To Bank A/c $1,300,000