Question

In a pre-2009 business combination, Acme Company acquired all of Brem Company’s assets and liabilities for cash. After the combination Acme formally dissolved Brem. At the acquisition date, the following book and fair values were available for the Brem Company accounts: Book Values Fair Values

Current assets        $ 81,800       $ 81,800

Equipment              131,000        198,000

Trademark              (0)                 352,000

Liabilities                (67,800 )       (67,800 )

Common stock        (100,000 )     (0)

Retained earnings    (45,000 )      (0)

In addition, Acme paid an investment bank $31,200 cash for assistance in arranging the combination.

1. Using the legacy purchase method for pre-2009 business combinations, prepare Acme’s entry to record its acquisition of Brem in its accounting records assuming the following cash amounts of $690,400 and $439,400 were paid to the former owners of Brem.

2. How would these journal entries change if the acquisition occurred post-2009 and therefore Acme applied the acquisition method? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round your intermediate calculations.)

Answer 1

Purchase Method 18 1) Purchase Price (including acquisition costs) (690400+31200) Less Fair values of net assets acquired (81800+198000+352000-67800) Goodwill 721,600 564,000 157,600 Journal Entry Account title & explanation Credit Current Assets Equipment Trademark Goodwill Liabilities Cash Debit 81,800 198,000 352,000 157,600 67,800 721,600 Acquisition date Fair Values; Purchase Price (including acquisition costs) (439400+31200) Less Fair values of net assets acquired (81800+198000+352000-67800) Bargain Purchase 470,600 564,000 (93,400)

Allocation of Bargain Purchase to long term assets acquired; Fair Value (A) 198,000 352,000 550,000 Proportion (A/550000)=(B) 36% Equipment Trademark Total reduction (C) 93,400 93,400 Asset reduction (B*C) 33624 59776 93400 64% Journal Entry Credit Account title & explanation Current Assets Equipment (198000-33624) Trademark (352000-59776) Liabilities Cash Debit 81,800 164,376 292,224 67,800 470,600 54 55 2. How would these journal entries change if the acquisition occurred post-2009 and therefore 56 Acme applied the acquisition method? 57 58 Acquisition Method 59 60 1) Consideration transferred 690,400 61 Less Fair Values of net assets acquired 564,000 Goodwill 126,400

Journal Entry Account title & explanation Credit Current Assets Equipment Trademark Goodwill Liabilities Cash Debit 81,800 198,000 352,000 126,400 67,800 690,400 31,200 Professional Service Expense Cash 31,200 2 Consideration transferred Less Fair Values of net assets acquired Bargain Purchase 439,400 564,000 (124,600)

Journal Entry Credit Account title & explanation Current Assets Equipment Trademark Liabilities Gain on Bargain Purchase Cash Debit 81,800 198,000 352,000 67,800 124,600 439,400 31,200 Professional Service Expense Cash 31,200