Question

Assume an investor purchases the net assets of an investee for the cash purchase price is $50,400. The investor is willing to purchase the investee's business for this amount because the fair value of PPE is $47,040 and the fair value of a (previously unrecognized) customer list is $10,080 (the fair values of all other assets and liabilities are equal to their book values). The investee company reports the following balance sheet on the acquisition date:

Cash $1,680 Accounts payable 3,360
Accounts receivable $3,360 Accrued liabilities 5,040
Inventories 6,720
Current assets 11,760 Current liabilities 8,400
Long-tem liabilities 6,720
PPE, net 16,800 Stockholders' equity 13,440
Total liabilities & equity $28,560 Total assets $28,560
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.
B. Provide the journal entry if the investor pays cash and purchases all of the stock of the investee's shareholders.

Answer 1

Answer and Explanation:

The Journal entries are shown below:-

A. Cash Dr, $1,680

Accounts receivable Dr, $3,360

Inventories Dr, $6,720

PPE, net Dr, $16,800

           To Accounts payable $3,360

           To Accrued liabilities $5,040

           To Long-term liabilities $6,720

           To Cash $13,440

(Being purchase of the assets and assumption of the liabilities is recorded)

B. Equity investment Dr, $13,440

                 To Cash $13,440

(Being purchase of the assets and assumption of the liabilities is recorded)