E 1-5 Journal entries to record an acquisition with direct costs and fair value/book value differencesOn January 1, Pop Corporation pays $400,000 cash and also issues 36,000 shares of $10 par common stock with a market value of $660,000 for all the outstanding common shares of Son Corporation. In addition, Pop pays $60,000 for registering and issuing the 36,000 shares and $140,000 for the other direct costs of the business combination, in which Son Corporation is dissolved. Summary balance sheet information for the companies immediately before the merger is as follows (in thousands): Pop Book ValueSon Book ValueSon Fair ValueCash$ 700$ 80$ 80Inventories  240 160 200Other current assets   60  40  40Plant assets—net  520 360 560Total assets$1,520$640$880Current liabilities $ 320 $ 60 $ 60Other liabilities  160 100  80Common stock, $10 par  840 400 Retained earnings  200  80 Total liabilities and owners’ equity$1,520$640 Required:Prepare all journal entries on Pop’s books to account for the acquisition.

Question
Asked Nov 19, 2019
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E 1-5 Journal entries to record an acquisition with direct costs and fair value/book value differences

  • On January 1, Pop Corporation pays $400,000 cash and also issues 36,000 shares of $10 par common stock with a market value of $660,000 for all the outstanding common shares of Son Corporation. In addition, Pop pays $60,000 for registering and issuing the 36,000 shares and $140,000 for the other direct costs of the business combination, in which Son Corporation is dissolved. Summary balance sheet information for the companies immediately before the merger is as follows (in thousands):

     

    Pop Book Value

    Son Book Value

    Son Fair Value

    Cash

    $ 700

    $ 80

    $ 80

    Inventories

      240

     160

     200

    Other current assets

       60

      40

      40

    Plant assets—net

      520

     360

     560

    Total assets

    $1,520

    $640

    $880

    Current liabilities

     $ 320

     $ 60

     $ 60

    Other liabilities

      160

     100

      80

    Common stock, $10 par

      840

     400

     

    Retained earnings

      200

      80

     

    Total liabilities and owners’ equity

    $1,520

    $640

     

    Required:

    Prepare all journal entries on Pop’s books to account for the acquisition.

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Expert Answer

Step 1

In order to account for acquisition of assets of business aquired, the fair value of the assets and liabilities acquired and the fair value of the consideration paid must be taken into consideration for computing the goodwill or bargain purchase.

Here the net fair value of Business Acquired in 000's= $(880-140)= $740

Fair value of share issue in (000)=660

Since the fair value of assets acquired is more than fair value of share issued, we have a bargain purchase of in(000)= (740-660)=$80

This ba...

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