Question

Precision Company acquires all of Springfield Company's voting stock for $5,000,000 in cash. Information on Springfield's...

Precision Company acquires all of Springfield Company's voting stock for $5,000,000 in cash. Information on Springfield's assets and liabilities at the date of acquisition is as follows:

Book Value

Dr (Cr)

Fair Value

Dr (Cr)

Current assets

$ 500,000

$ 700,000

Land, buildings and equipment (net)

2,000,000

3,500,000

Liabilities

(600,000)

(550,000)

Capital stock

(500,000)

Retained earnings

(1,400,000)


In addition, Springfield Company has unrecorded identifiable intangible assets, in the form of brand names and lease agreements, with a total estimated fair value of $400,000.

In eliminating entry (R) on the consolidation working paper, the debit to identifiable intangibles is:

A. $0

B. $400,000

C. $350,000

D. $250,000

0 0
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Answer #1

Answer : B.   $400,000

This question holds a subjective opinion, because in this question it is not clarified that whether unrecorded intangible assets holds any contractual or other legal rights. If we assume based on fair value given in the question for unrecorded intangible assets that there are contractual rights or the intangible can be separated and sold.In that sceneraio the eliminating entry (R) on the consolidation working paper, the debit to identifiable intangibles is $400,000.

Under the acquisition method, the new company records the assets, liabilities, and previously unrecorded intangibles of the acquirer and acquiree at fair value. Acquiree intangible assets are recorded in the consolidated financial statements at fair value as of the date of acquisition, even if not previously recorded on the acquiree books.

However, if unrecorded intangible assets do not have any contractual rights then the debit to identifiable intangibles becomes $0. as per guidelines issued by FASB.

FASB has stated that a parent company must identify all intangibles held by a subsidiary on the date of acquisition. For consolidation, the fair values of each of these purchased intangibles are included in investment cost, but only if contractual or other legal rights have been gained or if the intangible can be separated and sold (i.e., they are capable of alternative future use).

This guideline serves as a minimum standard for recognition of intangible assets in a corporate takeover.

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