Info

$163,000

The journal entry to record the purchase would be as follows:

Accounts Receivable (book and fair value) 28,000

Inventory (fair value) 45,000

Land (allocation) 32,600

Building (allocation) 52,160

Equipment (allocation) 32,600

Patent (allocation) 19,560

Brand-Name Copyright (allocation) 26,080

Current Liabilities (book and fair value) 5,000

Bond Payable (face value) 20,000

Premium on Bond Payable (adjust bonds to fair value) 1,000

Common Stock, $1 par, 4,000 shares 4,000

Paid-In Capital in Excess of Par, ($200,000 - $4,000 par) 196,000

Cash (for direct acquisition costs) 10,000

Dr. = Cr. Check Totals 236,000 236,000

Notice that when the price is a bargain, no amount is recorded for goodwill, because the price paid does not exceed the fair value of the net assets acquired.

Extraordinary Gain (price less than $47,000). Priority accounts are still recorded at full fair value. No amount is available for nonpriority accounts or for goodwill. The excess value of the priority accounts over the price paid will be recorded as an extraordinary gain. For example, assume that 600 shares of common stock, with a fair value of $50 each, were issued as consideration. The total price paid would be $40,000, which is $30,000 (600 shares X $50) of stock plus $10,000 of direct acquisition costs. The $40,000 is $7,000 less than the amount assigned to priority accounts, resulting in an extraordinary gain of $7,000. No allocations are needed, and the following entry is recorded:

Accounts Receivable (book and fair value) 28,000

Inventory 45,000

Current Liabilities (book and fair value) 5,000

Bond Payable (face value) 20,000

Premium on Bond Payable (adjust bonds to fair value) 1,000

Extraordinary Gain 7,000

Common Stock, $1 par, 600 shares 600

Paid-In Capital in Excess of Par, ($30,000 — $600 par) 29,400

Cash (for direct acquisition costs) 10,000

No amounts are recorded for nonpriority accounts or for goodwill.

The Excel tutorial, provided on a CD with this text, assists you in building an Excel template to allocate price to accounts under all possible price scenarios. An example of its application is included in the Summary Problem at the end of this chapter.

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