Question

1. In 2018, Evan Company spent $3,900,000 to acquire 100% of the outstanding stock of Haven Company, i.e., Evan bought Haven. As a result of the acquisition, Evan took over 100% of Haven’s assets AND Even became responsible for 100% of Haven’s liabilities. At the time of the purchase, Haven’s balance sheet reflected the following:

Cash                                                                                                 $ 300,000

Accounts receivable, net                                                              1,300,000

Investments                                                                                         900,000

Property, plant, and equipment, net                                           1,100,000

TOTAL ASSETS                                                                          $3,600,000

Accounts payable and accrued liabilities                                 $   750,000

Bonds payable                                                                                1,250,000

Common stock, $1 par value                                                             60,000

Additional paid-in-capital                                                                 800,000

Retained earnings                                                                               740,000

TOTAL LIABILITIES & SE                                                      $3,600,000

At the time of the purchase, Evan identified the following:

1. The fair value of Haven’s assets equaled their book value EXCEPT FOR the investments and the PP&E. The fair value of the investments was $1,200,000 while the fair value of the PP&E was $1,500,000.
2. The fair value of Haven’s liabilities equaled their book value EXCEPT FOR the bonds payable. The fair value of the bonds payable was $1,200,000.
3. Haven possessed an internally-developed customer list that Evan valued at $60,000.
4. Haven possessed an internally-developed patent that Evan valued at $300,000.

Prepare the entry Evan should make to reflect the purchase of Haven.

Answer 1

Evan Company acquires 100% stock of Haven Company.

Total purchase consideration = $ 3,900,000

                                               

Evan Company acquires the following assets and liabilities:

Assets:

            Cash                                                                  300,000

            Accounts Receivable                                      1,300,000

            Investment                                                      1,200,000

            Property Plant & Equipment                           1,500,000

            Patent (Unrecorded Asset)                               300,000

            Customer list (Unrecorded Asset)                      60,000

            Total assets                                                   4,660,000

Liabilities:

            Accounts payable                                              750,000

            Bonds payable                                                1,200,000

            Common stock                                                    60,000

            Total Liabilities                                             2,010,000

Net assets acquired = Assets – Liabilities

                                = 4,660,000 – 2,010,000

                                = 2,650,000

Note: All the assets and Liabilities should be recorded at Fair Value on the date of Acquisition. So, Investment, PPE and Bonds Payable should be recorded at their Fair Value.

Note: Internally Developed Customer list and Patent should also be treated as Assets because at the time of Acquisition their Fair value can be calculated, it means they are saleable. Hence, recorded as Assets while Acquisition at their Fair value.

Evan company Paid $ 3,900,000 for acquiring the Net assets of $ 2,650,000. It means Difference is paid for Goodwill.

Amount of Goodwill = 3,900,000 – 2,650,000

                                = 1,250,000

JOURNAL ENTRY:

Cash account Dr.                                                                     300,000

Account Receivable account Dr.                                           1,300,000

Investment account Dr.                                                          1,200,000

Property Plant & Equipment account Dr.                               1,500,000

Patent (Unrecorded Asset) account Dr.                                   300,000

Customer list (Unrecorded Asset) account Dr.                          60,000

Goodwill account Dr.                                                              1,250,000

            To Accounts payable account Cr.                                                           750,000

            To Bonds payable account Cr.                                                               1,200,000

            To Common stock account Cr.                                                                   60,000

            To Purchase Consideration                                                                   3,900,000

(Being assets and Liabilities acquired )