Question

Preacquisition Contingency On January 3, 2018, Prance Corporation purchased all of the busi‑ness operations of Step Corporation for $10 million cash. The acquisition is recorded as a merger. Step’s identifiable assets and liabilities are listed below at their fair values:Current assets $ 900,000Plant and equipment $5,000,000Estimated liability: defective product lawsuits (500,000)Other liabilities (3,000,000)The $500,000 estimated liability represented Step’s best estimate of likely losses due to lawsuits pending as of January 3, 2018. Later in 2018, as unfavorable information regarding the January 3, 2018 status of defective products became available, the estimated liability was increased to $650,000. Then, in late 2019, after observing that competitors were more frequently winning similar lawsuits, management re‑vised the estimated liability downward to $300,000.Required Prepare the entries made by Prance to record the original acquisition entry and the subsequent value changes in 2018 and 2019

Answer 1

Current Assets	900,000
Non-Current Assets	5,000,000
Total Assets	5.900,000
Estimated liability for defective products	(500,000)
Other liabilities	(3,000,000)
Total liabilities	(3,500,000)
Net Assets taken over	2,400,000
Net cash paid	10,000,000
Good will-(Cash paid -Net assets taken)	7,600,000
Original entry
Current Assets          Dr	900,000
Non-Current Assets Dr	5,000,000
Goodwill     Dr	7,600,000
To Estimated liability for defectives		500,000
To other liabilities		3,000,000
To Bank		10,0,000
(Being business takeover)
Changes in 2018 period
Liability increased from 500000 to 650000=by 150000
Goodwill        Dr          150,000        To Estimated liability for defectives       150,000 (Being liability increased)
Changes in 2019 period Liability reduced from 500000 to 300000=by 200000 Estimated liability for defectives 200,000        To Profit & Loss a/c 200,000 (being estimated liability reduced) Thank you giving a ? means me a lot