Question

You work in the accounting department of a company. Your company purchased the XYZ company six months ago, which recently incurred a 50% decline in revenues due to the lapsing of a key legal patent. Your company had recorded goodwill on the acquisition with reference to the above scenario, provide a one to two paragraph, respond to each question listed below 1. What are the accounting implications? Explain them. 2. How should the company record the impact of the revenues decline on the acquisition? Explain your rationale. 3. What promulgated accounting literature would you cite in support of your recommendation? Explain your response. 4. Identify the stakeholders that will be impacted by this discussion and if there are any conflicting or competing interest regarding the outcome. 5. Develop a recommended course of action regarding the accounting implications of the above discussion. Be sure to identify the advantages and disadvantages of this impact on the organization's financial statements.

Answer 1

Part a) accounting Implication on purchase of XYZ co.

The person who sells the business is called the vendor and the money paid for the business is called purchase price.

When a business is purchased, the buyer pays for the goodwill attached to the business:goodwill is purchase price less net value of assets taken over.

The purchased records the puchase of the business as follows:-

i) TO RECORD THE PURCHASE PRICE

debit purchase of business a/c

credit Vendors a/c

ii)TO RECORD EACH ASSET TAKEN OVER AT ADJUSTED VALUE

Debit each asset a/c including Goodwill,

credit purchase of business a/c

iii) TO RECORD EACH LIABILITY TAKEN OVER

debit purchase of business a/c

credit each liablity a/c

iv) TO PAY VENDOR

debit vendor's a/c

credit bank a/c

Part b) Recording impact of revenues decline on acquisition

Declining revenues will impact the Income statement of Company and hence will lessen down its profits. Lapse of Key Legal Patent is to be shown through removing patents from Intellectual Property classified as assets.

Further Same is to be mentioned under Notes to Financial Statements.

Part c) Recommendation would be to renew the lapsed legal patent right which will enhance the company's revenue and will bring back to its normal position.

Part d) Stakeholders that would be impacted will be majorly the shareholders who will receive low dividends in respect to the profits made by company.

Another would be the Lenders who will hesitate to fund the company in respect of low revenues, hence low profit.

Next would be the Investors who will refrain from investing in low profit making company.

Definitely, there will be conflicting interests regarding the outcome among stakeholders of company.