Question

Assume an investor purchases the net assets of an investee for the cash purchase price is $37,800. The investor is willing to purchase the investee's business for this amount because the fair value of PPE is $35,280 and the fair value of a (previously unrecognized) customer list is $7,560 (the fair values of all other assets and liabilities are equal to their book values). The investee company reports the following balance sheet on the acquisition date:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,400 Accounts payable . . . . . . . . . . . . . . . . . . . $ 2,800
Accounts receivable . . . . . . . . . . . . . . . . . 2,800 Accrued liabilities . . . . . . . . . . . . . . . . . . . 4,200
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 5,600
Current assets . . . . . . . . . . . . . . . . . . . . . $9,800 Current liabilities. . . . . . . . . . . . . . . . . . . . $ 7,000
Long-term liabilities . . . . . . . . . . . . . . . . . 5,600
PPE, net . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
Stockholders’ equity . . . . . . . . . . . . . . . . 11,200
Total assets . . . . . . . . . . . . . . . ........ . $23,800 Total liabilities and equity . . . . . . . . . . . . . 23,800

Required:
a. Provide the journal entry if the investor pays cash and purchases the assets and assumes the Liabilities of the investee company (assume that the fair value of the assets is equal to their book values).
b. Provide the journal entry if the investor pays cash and purchases all of the stock of the investee’s shareholders.

Answer 1

Answer:

a.

PPE $35,280 (debit)

Customer List $7,560 (debit)

Cash $1,400 (debit)

Accounts receivable $2,800 (debit)

Inventories  $5,600 (debit)

Accounts payable  $ 2,800 (credit)

Accrued liabilities  $ 4,200 (credit)

Long-term liabilities $ 5,600 (credit)

Gain on Bargain Purchase (Balancing figure) $2,240

Cash $37,800 (credit)

b.

Stockholders’ equity  $ 11,200 (debit)

Revaluation Reserve ( $21,280 + $7,560) $28,840 (debit)

Gain on Bargain Purchase (Balancing figure) $2,240

Investment $37,800 (credit)

Explanation:

The Excess of the Purchase Price (Consideration) over the Net Assets taken over is known as the Goodwill.

Whilst Excess of Net Assets taken over against the Purchase Price (Consideration) is known as a Gain on Bargain Purchase.

In this question we have a gain on bargain purchase.

Note that acquisitions happens at Fair Values not Book Values of Investee.