Question

Hamilton Company’s balance sheet on January 1, 2016, was as follows:

Hamilton Company

Balance Sheet

January 1, 2016

1	Cash	$30,000.00	Accounts payable	$20,000.00
2	Accounts receivable	80,000.00	Bonds payable	120,000.00
3	Marketable securities (short-term)	40,000.00	Pension liability	50,000.00
4	Inventory	100,000.00	Common stock	200,000.00
5	Property, plant, and equipment (net)	200,000.00	Retained earnings	60,000.00
6		$450,000.00		$450,000.00

Korbel Company is considering purchasing Hamilton (a privately held company) and discovers the following about Hamilton:

a.	No allowance for doubtful accounts has been established. A $10,000 allowance is considered appropriate.
b.	Marketable securities are valued at cost. The current market value is $60,000.
c.	The LIFO inventory method is used. The FIFO inventory of $140,000 would be used if the company is acquired.
d.	Land, included in property, plant, and equipment, which is recorded at its cost of $50,000, is worth $120,000. The remaining property, plant, and equipment is worth 10% more than its depreciated cost.
e.	The company has an unrecorded trademark that is worth $70,000.
f.	The company’s bonds are currently trading for $130,000.
g.	The pension liability is understated by $40,000.

Required:

1.	Compute the amount of goodwill if Korbel agrees to pay $500,000 cash for Hamilton.
2.	Next Level What are the reasons that the book value of Hamilton’s net identifiable assets differ from their market value?
3.	Prepare the journal entry to record the acquisition on the books of Korbel assuming Hamilton is liquidated.
4.	If Korbel agrees to pay only $400,000 cash, how much goodwill exists?
5.	If Korbel pays only $400,000 cash, prepare the journal entry to record the acquisition on its books, assuming Hamilton is liquidated.

CHART OF ACCOUNTS

Korbel CompanyGeneral Ledger

	ASSETS
111	Cash
112	Marketable Securities
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
160	Property, Plant, and Equipment
161	Land
182	Trademark
184	Goodwill

	LIABILITIES
211	Accounts Payable
221	Notes Payable
222	Pension Liability
224	Interest Payable
231	Salaries Payable
272	Bonds Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue
882	Gain on Purchase

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Income Tax Expense

Prepare the journal entry to record the acquisition of Hamilton by Korbel Company on January 1, 2016. Assume Korbel pays $500,000 cash and Hamilton is liquidated.

Prepare the journal entry to record the acquisition of Hamilton by Korbel Company on January 1, 2016. Assume Korbel pays $400,000 cash and Hamilton is liquidated.

Compute the amount of goodwill if Korbel agrees to pay $500,000 cash for Hamilton.

$ ____________________

DATE ACCOUNT TITLE POST. REF CREDIT DATE ACCOUNT TITLE POST. REF CREDIT

Answer 1

1)

2)

The main reason for differences between the book value of Hamilton and the market value is due to the market fluctuations of a particular asset or bonds with a similar characteristics in the market. Sometimes, these differences will also occur due to the name and fame like Goodwill etc. for Hamilton in the market.

3)

Journal Entry:

4)

Note: As per HOMEWORKLIB RULES, first four sub parts were answered, hence, please post the remaining sub part separately.