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EXERCISE 5-3 Allocation of Cost LO 2 Pace Company purchased 20,000 of the 25,000 shares of...

EXERCISE 5-3

Allocation of Cost LO 2

Pace Company purchased 20,000 of the 25,000 shares of Saddler Corporation for $525,000. On January 3, 2019, the acquisition date, Saddler Corporation’s capital stock and retained earnings account balances were $500,000 and $100,000, respectively.

The following values were determined for Saddler Corporation on the date of purchase:

Book Value Fair Value
Inventory $ 50,000 $ 70,000
Other current assets 200,000 200,000
Marketable securities 100,000 125,000
Plant and equipment 300,000 330,000

Required:

  1. Prepare the entry on the books of Pace Company to record its investment in Saddler Corporation.
  2. Prepare a Computation and Allocation Schedule for the difference between book value and the value implied by the purchase price in the consolidated statements workpaper.

Solutions

Expert Solution

1.

No Account Title and Explanation Debit Credit
1 Capital Stock - S Company $500,000
Retained Earnings- S Company $100,000
Difference Between Cost and Book Value $125,000
Investment In S Company $725,000

Explanation;

Inventory ($50,000 - $ 70,000) $20,000
Marketable Securities ($100,000- $125,000) $25,000
Plant and Equipment ($300,000 - $330,000) $30,000
Good Will $50,000
Difference Between implied and book value $125,000

B. )

Computation and Allocation of Difference Between Implied and Book Value

Cost of Investment (Purchase Price ) $525,000
Book Value of Equity Acquired $650,000
Difference between cost and Book Value $125,000
Adjustto fair value
Inventory ($50,000 - $70,000) $(20,000)
Marketable Securities ($100,000 - $125,000) ($25,000)
Plant and Equipment ($300,000 - $330,000) $(30,000)
Balance $50,000
Record Goodwill $50,000
Balance 0

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