Question

Asset acquisition vs. stock purchase (fair value equals book value)
Assume that an investor purchases the business of an investee. The investee company reports the following balance sheet on the acquisition date:

Cash	$2,800	Accounts payable	$5,600
Accounts receivable	5,600	Accrued liabilities	8,400
Inventories	11,200		-
Current assets	19,600	Current liabilities	14,000
		Long-term liabilities	11,200
PPE, net	28,000	Stockholders’ equity	22,400
Total assets	$47,600	Total liabilities and equity	$47,600

Parts a. and b. are independent of each other.

a. Provide the journal entry if the investor pays cash and purchases the assets and assumes the liabilities of the investee company (assume that the fair value of the assets is equal to their book values).

If no additional debit entries are required, select "No entry" as the answer.

General Journal
Description	Debit	Credit
Cash	Answer	Answer
Accounts receivable	Answer	Answer
Inventories	Answer	Answer
PPE, net	Answer	Answer
AnswerCashEquity investmentGoodwillInvestee's stockholder's equityNo entry	Answer	Answer
Accounts payable	Answer	Answer
Accrued liabilities	Answer	Answer
Long-term liabilities	Answer	Answer
AnswerCashEquity investmentGoodwillInvestee's stockholder's equityNo entry	Answer	Answer

b. Provide the journal entry if the investor pays cash and purchases all of the stock of the investee’s shareholders.

General Journal
Description	Debit	Credit
AnswerCashEquity investmentGoodwillInvestee's stockholder's equityNo entry	Answer	Answer
AnswerCashEquity investmentGoodwillInvestee's stockholder's equityNo entry	Answer	Answer

Answer 1

• All working (in any required) forms part of the answer
• Part ‘a’

---Investor has acquired assets and liabilities and paid the cash. Since cash is being paid, it will be credited.

Full journal entry would be:

General Journal
Description	Debit	Credit
Cash	$                    2,800.00
Accounts receivable	$                    5,600.00
Inventories	$                  11,200.00
PPE, net	$                  28,000.00
Answer: No entry	$                             -
Accounts payable	$                             -	$                              5,600.00
Accrued liabilities	$                             -	$                              8,400.00
Long-term liabilities	$                             -	$                             11,200.00
Answer: Cash	$                            -	$                             22,400.00

• Part ‘b’

---If Stock is purchased, it is recorded as an investment on Asset side by debiting it while recording. Again, since the cash is paid for purchasing, it will be credited.

Complete journal entry would be:

	General Journal
	Description	Debit	Credit
	Answer: Equity investment	$                  22,400.00	$                                        -
	Answer: Cash	$                            -	$                             22,400.00