Question

In: Accounting

Asset acquisition vs. stock purchase (fair value equals book value) Assume that an investor purchases the...

Asset acquisition vs. stock purchase (fair value equals book value)
Assume that an investor purchases the business of an investee. The fair value of the investee company is equal to its reported book value and the fair values of the individual net assets are equal to their reported book values. The investee company reports the following balance sheet on the acquisition date:

Cash $1,680 Accounts payable $3,360
Accounts receivable 3,360 Accrued liabilities 5,040
Inventories 6,720 -
Current assets 11,760 Current liabilities 8,400
Long-term liabilities 6,720
PPE, net 16,800 Stockholders’ equity 13,440
Total assets $28,560 Total liabilities and equity $28,560


Parts a. and b. are independent of each other.

a. Provide the journal entry if the investor pays cash and purchases the assets and assumes the liabilities of the investee company.

If no additional debit entries are required, select "No entry" as the answer.

General Journal
Description Debit Credit
Cash Answer Answer
Accounts receivable Answer Answer
Inventories Answer Answer
PPE, net Answer Answer
AnswerCashEquity investmentGoodwillInvestee's stockholder's equityNo entry Answer Answer
Accounts payable Answer Answer
Accrued liabilities Answer Answer
Long-term liabilities Answer Answer
AnswerCashEquity investmentGoodwillInvestee's stockholder's equityNo entry Answer Answer


b. Provide the journal entry if the investor pays cash and purchases all of the stock of the investee’s shareholders.

General Journal
Description Debit Credit
AnswerCashEquity investmentGoodwillInvestee's stockholder's equityNo entry Answer Answer
AnswerCashEquity investmentGoodwillInvestee's stockholder's equityNo entry Answer Answer

Solutions

Expert Solution

a. Provide the journal entry if the investor pays cash and purchases the assets and assumes the liabilities of the investee company.
If no additional debit entries are required, select "No entry" as the answer.
General Journal
Description Debit Credit
Cash $   1,680.00
Accounts receivable $   3,360.00
Inventories $   6,720.00
PPE, net $ 16,800.00
No entry
          Accounts payable $3,360
          Accrued liabilities $       5,040.00
          Long-term liabilities $       6,720.00
          Cash $     13,440.00
b. Provide the journal entry if the investor pays cash and purchases all of the stock of the investee’s shareholders.
General Journal
Description Debit Credit
Equity investment 13,440
                 Cash 13,440

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