Question

In: Accounting

The following book and fair values were available for Westmont Company as of March 1. Book...

The following book and fair values were available for Westmont Company as of March 1.

Book Value Fair Value
Inventory $ 692,500 $ 643,750
Land 757,500 1,047,750
Buildings 1,755,000 2,073,750
Customer relationships 0 804,750
Accounts payable (102,000 ) (102,000 )
Common stock (2,000,000 )
Additional paid-in capital (500,000 )
Retained earnings 1/1 (434,500 )
Revenues (488,500 )
Expenses 320,000

Arturo Company pays $3,580,000 cash and issues 29,800 shares of its $2 par value common stock (fair value of $50 per share) for all of Westmont’s common stock in a merger, after which Westmont will cease to exist as a separate entity. Stock issue costs amount to $28,200 and Arturo pays $49,100 for legal fees to complete the transaction.

Prepare Arturo’s journal entry to record its acquisition of Westmont. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Solutions

Expert Solution

The journal entries required are:

Transaction Accounts title Debit Credit
1 Inventory $643,750
Land $1,047,750
Building $2,073,750
Customer Relationship $804,750
Goodwill [balancing figure] $602,000
   Accounts Payable $102,000
   Common Stock [29800 shares x $ 2] $59,600
   Additional Paid in Capital [29800 shares x $48] $1,430,400
   Cash $3,580,000
(to record the acquisition)
2 Professional Service Expense $49,100
   Cash $49,100
(to record legal fees)
3 Additional Paid in Capital $28,200
   Cash $28,200
(Stock issue cost)

In Entry #1, all assets taken over and liabilities taken over are recorded at Fair Value [debited and credited respectively]. Amount paid as purchase consideration is credited [Cash, Common Stock, additional capital), and difference is debited to Goodwill account.


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