Question

In: Accounting

Sully Company’s January 1, 2020 balance sheet is as follows: Assets Liabilities & Equity Cash, receivables...

Sully Company’s January 1, 2020 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 2,000,000

Land, buildings & equipment 5,500,000 Retained earnings 3,500,000

Accumulated other comprehensive loss (400,000)

_________ Treasury stock (100,000)

Total assets $13,500,000 Total liabilities & equity $13,500,000

On January 1, 2020, Pronto Corporation acquired Sully’s assets and liabilities for $50 million in cash. Sully’s cash and receivables, and current liabilities were reported at values approximating fair value. However, its inventories were overvalued by $2,000,000, and its equity method investments were undervalued by $3,000,000. Its land, buildings & equipment were overvalued by $2,500,000, and its long-term liabilities were undervalued by $500,000. The accountants identified the following possible intangible assets attributed to Sully but not currently recorded on its balance sheet:

Fair Value

Skilled workforce $7,000,000

Favorable leases 5,000,000

Developed technology 2,000,000

Prospective customer contracts 1,500,000

Synergies on future projects 3,000,000

Required

Prepare Prance’s journal entry to record the acquisition.

Expert Solution

Answer -

Step - (1) - Information given -

On January 1, 2020, Pronto Corporation acquired Sully’s assets and liabilities for $50000000 in cash.

Step - (2) - Calculation of Fair Value of Assets and Liabilities taken over -

Assets	Fair Value ( $ )	Liabilities	Fair Value ( $ )
Cash, receivables	3000000	Current liabilities	2000000
Inventories [ $4000000 - $2000000 ( inventories were overvalued by $2000000) ]	2000000	Long-term liabilities [ $6500000 + $500000 ( long-term liabilities were undervalued by $500000) ]	7000000
Equity method investments [ $1000000 + $3000000 ( equity method investments were undervalued by $3000000) ]	4000000
Land, buildings & equipment [ $5500000 - $2500000 ( land, buildings & equipment were overvalued by $2500000) ]	3000000
Total	12000000	Total	9000000

Step - (3) - Calculation of Purchase consideration -

Already given = $50000000.

Step - (4) - Calculation of Net Assets -

Fair value of total assets - Fair value of total liabilities

= $12000000 - $9000000 [ As per step - (2) ]

= $3000000.

Step - (5) - Calculation of Goodwill -

Goodwill = Purchase consideration - Net Assets

Step - (3) - Step - (4)

= $50000000 - $3000000

= $47000000.

Step - (6) - Journal Entries for Acquisition of Sully Company -

	Particulars	Debit ( $ )	Credit ( $ )
1)	Business Purchase Liquidator of sully company ( Business Purchased recorded )	50000000 -	- 50000000
2)	Cash, receivables Inventories Investments Land, buildings & equipment Goodwill ( balancing figure ) Current liabilities Long-term liabilities Business Purchase ( Assets and Liabilities taken over recorded )	3000000 2000000 4000000 3000000 47000000 - -	- - - - - 2000000 7000000 50000000
3)	Liquidator of sully company Cash ( Cash paid to liquidator of sully company )	50000000 -	- 50000000
	Total	159000000	159000000

ekkarill92 answered 1 year ago

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