Question

Problem 2:

Bellamerica Co’s January 1, 2017 balance sheet is as follows:

Assets		Liabilities & Equity
Cash, receivables	$ 3,000,000	Current liabilities	$ 2,000,000
Inventories	4,000,000	Long-term liabilities	6,500,000
Equity method investments	1,000,000	Capital stock	4,000,000
Land, buildings & equipment	5,500,000	Retained earnings	3,500,000
Goodwill	2,000,000	Accumulated other comprehensive loss	(400,000)
	_________	Treasury stock	(100,000)
Total assets	$15,500,000	Total liabilities & equity	$15,500,000

On January 1, 2017, Prance Corporation acquired Bellamerica’s assets and liabilities for $40 million in cash. Bellamerica’s cash, receivables, and current liabilities were reported at values approximating fair value. Its inventories were overvalued by $1,500,000, and its equity method investments were undervalued by $4,000,000. Its land, buildings & equipment were undervalued by $5,000,000. Its long-term liabilities were overvalued by $500,000. The accountants identified the following possible intangible assets attributed to Bellamerica but not currently recorded on its balance sheet:

	Fair Value
Skilled workforce	$7,000,000
Internet domain name	2,000,000
Developed technology	1,000,000
Customer order backlog	500,000
Synergies on future projects	4,000,000

Required

Prepare the JE made by Prance to record the business combination as a merger.

Answer 1

Step A: Given,

On January 1, 2017, Prance Corporation acquired Bellamerica’s assets and liabilities for $40,000,000 in cash.

Step B: Calculation of Fair Value of Assets and Liabilities taken over:

Assets		Fair value ($)
Cash, receivables		3000000
Inventories	4000000
Less: Overvalue	1500000	2500000
Equity method investments	1000000
Add: Undervalue	4000000	5000000
Land, Buildings, and equipment	5500000
Add: Undervalue	5000000	10500000
Total		21000000

Liabilities		Fair value ($)
Current Liabilities		2000000
Long-term liabilities	6500000
Less: Overvalue	500000	6000000
Total		8000000

Step C: Calculation of Purchase consideration

Already given $40,000,000 in cash

Step D: Calculation of Net Assets

Net Assets = Fair value of total assets - Fair value of total liabilities

= $21,000,000 − $8,000,000 [ As per step B ]

= $13,000,000

Step E: Calculation of Goodwill (Step C - Step D)

Goodwill = Purchase consideration - Net Assets

= $40,000,000 − $13,000,000

= $27,000,000

Step F: Journal Entries

	Particulars	Debit ($)	Credit ($)
1)	Business Purchase Liquidator of Bellamerica company (The transaction of business purchase recorded)	40000000 −	− 40000000
2)	Cash, receivables Inventories Investments Land, building, and equipment Goodwill (Balancing figure) Current liabilities Long-term liabilities Business purchase (The transaction of assets and liabilities taken over recorded)	3000000 2500000 5000000 10500000 27000000 − − −	− − − − 2000000 6000000 40000000
3)	Liquidator of Bellamerica company Cash (The transaction of cash paid to the liquidator of )	40000000 −	− 40000000

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