Question

Fresh Cut Corporation purchased all the outstanding common stock of Premium Meats for $12,000,000 in cash. The book values and fair values of Premium Meats' assets and liabilities were: Book Value Fair Value Accounts Receivable $ 1,800,000 $ 1,600,000 Equipment 8,500,000 9,900,000 Patents 300,000 1,700,000 Notes Payable (2,700,000 ) (2,700,000 ) Net assets $ 7,900,000 $ 10,500,000
Required:

1. Calculate the amount Fresh Cut should report for goodwill. (Enter your answer in millions rounded to 1 decimal place. (i.e., $5,500,000 should be entered as 5.5).)

2. Record Fresh Cut's acquisition of Premium Meats. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

Answer 1

Answer:

goodwill                                                          1,500,000 debit

increasein FV equipment - Premium meat 1,400,000 debit

increase in FV Patents  - Premium meat     1,400,000 debit

Investment Premium Meats                         7,900,000 debit

cash                                                                 12,000,000 credit

decrease in fair value A/R -Premium Meat       200,000 credit

Explanation:

cost:                                    12,000,000

fair value of the company: 10,500,000

                 goodwill               1,500,000

the entry will recognize the goodwill and the increase or decrease in fair value to match the price of acquisition

the investment account will be valued at book value as is expected that the fair value difference will disappear overtime due to depreciation, amortization and other factors.