In: Accounting
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 |
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 |