On June 30, 2011, Sampras Company reported the following account balances:
Receivables | $ 80,000 | Current liabilities | $ (10,000) |
Inventory | 70,000 | Long-term liabilities | (50,000) |
Buildings (net) | 75,000 | Common stock | (90,000) |
Equipment (net) | 25,000 | Retained earnings | (100,000) |
Total assets | $250,000 | Total liabilities and equities | $(250,000) |
On June 30, 2011, Pelham paid $300,000 cash for all assets and liabilities of Sampras, which will cease to exist as a separate entity. In connection with the acquisition, Pelham paid $10,000 in legal fees. Pelham also agreed to pay $50,000 to the former owners of Sampras contingent on meeting certain revenue goals during 2012. Pelham estimated the present value of its probability adjusted expected payment for the contingency at $15,000.
In determining its offer, Pelham noted the following pertaining to Sampras:
• It holds a building with a fair value $40,000 more than its book value.
• It has developed a customer list appraised at $22,000, although it is not recorded in its financial records.
• It has research and development activity in process with an appraised fair value of $30,000. However, the project has not yet reached technological feasibility and the assets used in the activity have no alternative future use.
• Book values for the receivables, inventory, equipment, and liabilities approximate fair values.
Prepare Pelham’s accounting entry to record the combination with Sampras using the
a. Acquisition method.
b. Purchase method.
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