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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Hamilton Company’s balance sheet on January 1, 2019, was as follows:

Chapter 12, Problem 7P, Hamilton Companys balance sheet on January 1, 2019, was as follows: Korbel Company is considering

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.

1.

To determine

Calculate the amount of goodwill of Company H.

Explanation

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 of Company H:

ParticularsAmount ($)
Amount willing to pay$500,000
Less: Identifiable net assets$415,000
Goodwill$85,000

Table (1)

Compute the identifiable net assets:

AssetsAmount ($)
Cash $30,000
Accounts receivable (net) (1)70,000
Marketable securities (short-term)60,000
Inventory  140,000
Land 120,000
Plant Property &Equipment (2)165,000
Trademark  70,000
Total assets  (a)$655,000
Liabilities 
Accounts payable20,000
Bonds payable130,000
Pension liability90,000
Total liabilities (b)$240,000
Identifiable net assets (ab)

2.

To determine

State the reason for the difference in the book value of Company H’s identifiable net assets from the market value.

3.

To determine

Prepare journal entry for the given transaction.

4.

To determine

Compute the amount of goodwill that exist, when Company K agrees pay only $400,000 cash.

5.

To determine

Prepare journal entry for the given transaction.

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