In: Accounting
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.
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 |