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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Marino Company had the following balance sheet on January 1, 2019:

Chapter 12, Problem 18E, Marino Company had the following balance sheet on January 1, 2019: On January 2, 2019, Paul Company

On January 2, 2019, Paul Company purchased Marino by acquiring all its outstanding shares for $300,000 cash. On that date, the fair value of the inventory was $30,000, and the fair value of the equipment was $240,000. In addition, the fair value of a previously unrecorded customer list was $25,000. For all other amounts, the book value of January 1, 2019, equaled fair value.

Required:

  1. 1. Compute the goodwill associated with the purchase of Marino.
  2. 2. Prepare the journal entry necessary at January 1, 2019, to record the acquisition of Marino.

1.

To determine

Calculate the amount of goodwill that is associated with the purchase of Company M.

Explanation

Intangible assets: These are the long-term assets which are not physical in nature, but possess value. The intangible assets would be amortized over their definite useful life or limited useful life, and those with indefinite or unlimited lives are not amortized.

Goodwill: Goodwill is the good reputation developed by a company over years. This is recorded as an intangible asset, and is quantified when other company acquires. Goodwill should be recorded only when one company is acquired by another company. Goodwill value would be impaired, if the book value of goodwill is less than fair market value.

Calculate the amount of goodwill that is associated with the purchase of Company M as follows:

ParticularsAmountAmount
Purchase price of Company M $300,000
Less: Current fair value of identifiable net assets:  
    Book value of identifiable net assets (1)$140,000 
    Revaluation of inventory (2)($10,000) 
     Revaluation of equipment (3)$40,000 
    Customer list$25,000($195,000)
Difference attributable to goodwill $105,000

Table (1)

Working note (1):

Calculate the book value of identifiable net assets...

2.

To determine

Prepare journal entry to record the acquisition of Company M at January 1, 2019.

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