Question

2.8 Measurement Period Adjustment with Income Effects

On November 1, 2019, Placer Corporation acquired all of the assets and liabilities of Sonata Company. The acquisition generated goodwill of $50,000,000. At the date of acquisition, Sonata’s equipment had an estimated fair value of $27,000,000, and a 4-year life, straight-line. On March 31, 2020, new information reveals that the equipment’s fair value was $36,000,000 at the date of acquisition. Placer’s accounting year ends on December 31.

Required:

Prepare the journal entry or entries to record the change in valuation of Sonata’s equipment on March 31, 2020, assuming the valuation change is within the measurement period, and depreciation has already been recorded through March 31. (Show any calculations made)

Answer 1

Value of asset on March 2020 when the fair value is estimated to be $27,000,000:

= Fair value – Depreciation

= $27,000,000 – [(Cost – Salvage value)/Estimated life]*5/12

= $27,000,000 – [($27,000,000 – $0)/4]*5/12

= $27,000,000 – ($6,750,000*5/12)

= $27,000,000 – $2,812,000

= $24,187,500  

    

Value of asset on March 2020 when the fair value is estimated to be $36,000,000

= $36,000,000 – [(Cost – Salvage value)/Estimated life]*5/12

= $36,000,000 – [($36,000,000 – $0)/4]*5/12

= $36,000,000 – ($9,000,000*5/12)

= $36,000,000 – $3,750,000

= $32,250,000

Difference in value of assets = $32,250,000 – $24,187,500

                                               = $8,062,500

Actual increase when fair value is estimated as $36,000,000 instead of $27,000,000 is:

= $36,000,000 – $27,000,000

= $9,000,000

Thus,

Depreciation effect = $9,000,000 – $8,062,500

                                = $937,500

So, Journal entry would be:

Equipment A/c                                    Dr. $8,062,500

Depreciation A/c                                 Dr. $937,500

             To Goodwill A/c                                                        Cr. $900,000

(Being effect on goodwill after valuation is recorded)