Question

Problem 38 This is data from the Marjean Company: Accounts Receivable Inventory Fixed Assets Accum Deprec 30,000 150,000 400,000 Accounts Payable Note Payable Owners' Equity $100,000 80,000 $600,000 200,000 400,000 Burden Co. will buy Marjean Company for $1,200,000. They estimate the Accounts Receivable are worth $ 96,000, the Inventory is worth $90,000 and the Fixed Assets are worth $800,000. The Note Payable is interest only at 10% with the principal due 5 years from today. Current interest is 12%. Everything else is worth its book value. Prepare the journal entry for the purchase on Burden Co.'s books no

Answer 1

Journal entry:

Account title and explanation	Debit	Credit
Accounts receivable	$96,000
Inventory	$90,000
Fixed assets	$800,000
Goodwill	$383,186
Accounts payable		$30,000
Note payable*		$139,186
Cash		$1,200,000
[To record purchase of Marjeen Company]

Calculations:

i. Calculation of net assets acquired:

Net assets acquired
Accounts receivable	$96,000
Inventory	$90,000
Fixed assets	$800,000
Total assets	$986,000
(Less): Liabilities
Accounts payable	($30,000)
Note payable*	($139,186)
Net assets acquired	$816,814

ii. Calculation of goodwill:

Purchase consideration	$1,200,000
(Less): Net assets acquired	($816,814)
Good will	$383,186

*Present value of Notes payable:

Interest per year = $150,000 x 10% = $15,000

Present value of interest payment	$54,072
[$15,000 x 3.604776 Present value annuity factor (12%, 5 years)]
Present value of principal amount	$85,114
[$150,000 x 0.567427 Present value factor (12%,5 years]
Present value of the notes payable	$139,186