Question

Exercise 2-1

Preston Company acquired the assets (except for cash) and assumed the liabilities of Saville Company. Immediately prior to the acquisition, Saville Company’s balance sheet was as follows:

		Book Value		Fair Value
Cash		$109,980		$109,980
Receivables (net)		190,180		209,800
Inventory		340,720		363,860
Plant and equipment (net)		492,240		577,650
Land		415,110		671,300
Total assets		$1,548,230		$1,932,590
Current Liabilities		$585,370		$538,200
Common stock ($5 par value)		449,960
Other contributed capital		128,990
Retained earnings		383,910
Total equities		$1,548,230

(a)

Prepare the journal entries on the books of Preston Company to record the purchase of the assets and assumption of the liabilities of Saville Company if the amount paid was $1,547,580 in cash. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Answer 1

Calculation of Purchase consideration

Here purchase consideration is calculated as per net payments method

Purchase consideration     = $1,547,580

Net assets at fair value       = $1,932,590 - $ 538,200

                                                  = $1,394,390

Goodwill to be recorded** = 1,547,580 – 1,394,390

                                                   = 1,53,190 (Note 1)

(As Net assets taken over is less than the purchase consideration account goodwill to be recorded here, else capital reserve to be recorded)

Entries in the books of Preston Company (Amount in $)

1) Business purchase A/c                               1,547,580

           To Liquidators of Saville company              1,547,580

(Being purchase consideration due entry passed)

2) Land A/c                                                      671,300

     Plant and equipment A/c 577,650

Inventory A/c 363,860

     Receivables A/c 209,800

     Cash A/c                                                      109,980

     Good will A/c ** (from Note 1) 153,190

To Current liabilities                                 538,200

                 To Business Purchase A/C                     1,547,580

(Being assets and liabilities are taken at fair value and difference between purchase consideration and net assets is considered as Goodwill as Purchase consideration is more than fair value of net assets)

3) Liquidators of Saville company A/c 1,547,580

         To Cash A/c                                                     1,547,580

(Being Purchase consideration discharged)