Textbook Problem

Hamilton Company’s balance sheet on January 1, 2019, was as follows:

Korbel Company is considering purchasing Hamilton (a privately held company) and discovers the following about Hamilton:

1. a. No allowance for doubtful accounts has been established. A $10,000 allowance is considered appropriate.
2. b. Marketable securities are valued at cost. The current market value is $60,000.
3. c. The LIFO inventory method is used. The FIFO inventory of $140,000 would be used if the company is acquired.
4. d. Land, included in property, plant, and equipment, which is recorded at its cost of $50,000, is worth $120,000. The remaining property, plant, and equipment is worth 10% more than its depreciated cost.
5. e. The company has an unrecorded trademark that is worth $70,000.
6. f. The company’s bonds are currently trading for $130,000.
7. g. The pension liability is understated by $40,000.

Required:

1. 1. Compute the amount of goodwill if Korbel agrees to pay $500,000 cash for Hamilton.
2. 2. Next Level What are the reasons that the book value of Hamilton’s net identifiable assets differ from their market value?
3. 3. Prepare the journal entry to record the acquisition on the books of Korbel assuming Hamilton is liquidated.
4. 4. If Korbel agrees to pay only $400,000 cash, how much goodwill exists?
5. 5. If Korbel pays only $400,000 cash, prepare the journal entry to record the acquisition on its books, assuming Hamilton is liquidated.