On Dec 31, 2019, Ahmed Ali issued $200,000 in debt and 20,000 new shares of its...

On Dec 31, 2019, Ahmed Ali issued $200,000 in debt and 20,000 new shares of its $10 par value stock to Rasha Incorporation owners in exchange for all of the outstanding shares of that company. Ahmed Ali shares had a fair value of $30 per share. Prior to the combination, the financial statements for Ahmed Ali & Rasha for ending Dec 31, 2019 were as follows:

	Rasha	Ahmed Ali
Revenue	900,000	300,000
Expenses	-660,000	-200,000
Net income	240,000	100,000

Retained earnings (opening)	300,000	140,000
Net income	240,000	100,000
Dividends paid	-90,000	0
Retained earnings (closing)	450,000	240,000

Cash	20,000	40,000
Receivables	400,000	200,000
Patented technology	900,000	450,000
Equipment	750,000	600,000
Total assets	2,070,000	1,290,000

Liabilities	1,000,000	500,000
Common stock	350,000	250,000
Additional paid in capital	270,000	300,000
Retained earnings	450,000	240,000
Total liabilities & equity	2,070,000	1,290,000

Ahmed Ali also paid $10,000 to a broker for arranging the transaction. In addition, Ahmed Ali paid $25,000 in stock issuance costs. Rasha Incorporation equipment was worth $820,000 and its patented technology was valued at only $920,000.

Complete the following tasks:

a. Pass journal entry of the investment in the books of Ahmed Ali?

b. Pass journal entry of the brokerage and stock issue cost in the books of Ahmed Ali

c. Calculate the Goodwill or Barging Gain?

Expert Solution

Answer :

1) Journal Entry of investment in the books of Ahmed Ali

		Dr. ($)	Cr ($)
1	Investment in Rash Incorporation	400000
	To Share Capital (20000 Sahres x $10)		200000
	To Debt		200000
	(Being investment made in Rash Inc by issuing 20000 shares of $10 each and debt securities)

2)Journal entry of the brokerage and stock issue cost in the books of Ahmed Ali

	Dr. ($)	Cr. ($)
Brokerage Fees	10000
Stock Issue cost	25000
To Bank Account		35000
(Being stock issue cost and brokerage fees paid by Ahmad Ali Inc

3) Calculation of Goodwill or Bargain Purchase

Particular		$
Consideration Paid
Debt	200000
Share Capital	200000
Total Consideration		400000
Less: Fair value of assets and liabilities assumed at acquisition (Equity
Share Capital	350000
Revaluation of Equipment	70000
Revaluation of Patented Technology	20000
		(440000)
Gain on Bargin Purchase		40000

The bargain gain is calculated as the difference between the total invesment by Ali and the total equity from Rash. The consideration of the investment seems to be less than the equity, hence it is a gain. If the investment was higher than the total equity, it could have been goodwill.

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