Question

Pharma Company acquired the assets (with the exception of cash) and assumed the liabilities of Astra Company on January 2, 2020 paying $720,000 cash. Astra Company's December 31, 2019 balance sheet reflecting both book and fair values is shown below: Book Value Fair Value $65,000 99,000 162,000 450,000 288,000 $1,064,000 Accounts Receivable, net Inventory Land Buildings, net Equipment,net Total Accounts Payable Note Payable Common Stock $2 par value Other Contributed Capital Retained Earnings Total $72,000 86,000 110,000 369,000 237,000 $874,000 $83,000 180,000 153,000 229,000 229,000 $874,000 As part of the negotiations, Pharma agreed to pay the former stockholders of Asta Company $200,000 if the postcombination earnings of the combined company (Pharma) reach certain levels during 2020 and 2021. The fair value of the contingent consideration was estimated to be $100,000 on the date of acquisition. Required: A. B. Record the journal entry on the books of Pharma Company to record the acquisition of Astra on January 2, 2020. During 2020, the likelihood of meeting the postcombination earnings goal increased. As a result, at the end of 2020, the fair value of the consideration was $120,000. Prepare any journal entry needed to account for the change in the fair value of the contingent consideration. During 2021, the likelihood of meeting the post combination earnings goal signficantly decreased and the contingent consideration target was not met. Prepare any journal entry needed to account for the change in the fair value of contingent consideration. C.

Answer 1

A.

IN THE BOOKS OF PHARMA COMPANY

JOURNAL ENTRIES

DATE	ITEM	DEBIT AMOUNT	CREDIT AMOUNT
JAN 2 a	PURCHASE CONSIDERATION	720,000
	TO ASTRA COMPANY		720,000
b	ACCOUNTS RECEIVABLE	72,000
	INVENTORY	86,000
	LAND	110,000
	BUILDING	369,000
	EQUIPMENT	237,000
	GOODWILL	109,000
	TO ACCOUNTS PAYABLE		83,000
	TO NOTES PAYABLE		180,000
	TO BUSINESS PURCHASE		720,000
c	PAYMENT TO ASTRA COMPANY	720,000
	TO CASH		720,000
d	CONTINGENT CONSIDERATION	100,000
	TO LIABILITY		100,000

NOTE:

GOODWILL STATED IN b ENTRY IS THE ADJUSTED BALANCE BETWEEN ASSSETS AND LIABILITIES AND PURCHASE AMOUNT. THAT IS, (72000+86,000+110,000+369,000+237,000) - (83,000+180,000+720,000). AS THE CREDIT EXCEEDS DEBIT THE BALANCED AMOUNT IS TRANSFERRED TO GOODWILL ACCOUNT.