Question

Allerton Company acquires all of Deluxe Company’s assets and liabilities for cash on January 1, 2018, and subsequently formally dissolves Deluxe. At the acquisition date, the following book and fair values were available for the Deluxe Company accounts:
Book Values Fair Values
Current assets $41,500 $41,500
Building 108,000 67,000
Land 17,000 35,200
Trademark 0 31,800
Goodwill 19,000 ?
Liabilities (50,500) (50,500)
Common stock (100,000)
Retained earnings (35,000 )
Prepare Allerton’s entry to record its acquisition of Deluxe in its accounting records assuming the following cash exchange amounts:
1) $166,000
2) $96,000

Answer 1

Answer:

Scenario 1. Cash Exchange of $166,000

Current assets $41,500 (debit)

Building $67,000  (debit)

Land $35,200  (debit)

Trademark $ 31,800  (debit)

Goodwill  $41,000 (debit)

Liabilities $50,500 (credit)

Investment in Deluxe Company $166,000 (credit)

Scenario 1. Cash Exchange of $166,000

Current assets $41,500 (debit)

Building $67,000  (debit)

Land $35,200  (debit)

Trademark $ 31,800  (debit)

Liabilities $50,500 (credit)

Investment in Deluxe Company $96,000 (credit)

Gain on Bargain Purchase $29,000 (credit)

Explanation:

All assets and liabilities of Deluxe Company have been acquired by Allerton Company. This is known as a Business Combination in terms of IFRS 3.

During a Business Combination transaction, Assets and Liabilities are Acquired at their Fair Values instead of Book Values.

Any Excess of the Purchase Price (Consideration) over the Net Assets taken over is known as Goodwill otherwise it is known as a Gain on Bargain Purchase.