Question

PROBLEM 4 Gull Company purchased the net assets of Hart Company on January 1, 20X1, and made the following entry to record the purchase: Current Assets.... Equipment. Land. Buildings...... Goodwill.. Liabilities.... Common Stock (54 par). Paid-In Capital in Excess of Par.... 100,000 150,000 50,000 300,000 100,000 80,000 100,000 520,000 Make the required entry on the given dates, for each of the following independent contingency agreements: 1. An additional cash payment would be made on January 1, 20X4, equal to thrice the amount by which average annual earnings of the Hart Division exceed $32,000 per year, prior to January 1, 20X3. Net income was $69,000 in 20X1, $81,000 in 20X2 and $96,000 in 20X3. Assume that the liabilities recorded on January 1, 20X1, include an estimated contingent liability recorded at an estimated amount $40,000. 2. Added shares would be issued on January 1, 20X3, equal in value to twice the amount by which average annual earnings of the Hart Division exceed $25,000 per year, prior to January 1, 20X3. Net income was $70,000 in 20X1 and $76,000 in 20X2. The market price of the shares on January 1, 20X3, was $6. 3. Added shares would be issued on January 1, 20X3, to compensate for any fall in the value of Gull common stock below $10 per share. The settlement would be to cure the deficiency by issuing added shares based on their fair value on January 1, 20X3. The market price of the shares on January 1, 20X3, was $8.

Answer 1

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ements. Journal entries : Requirements: particolars Debit credit (1) 4000D Estimated liability for Contingent consideration Ale or loss on Estimated contingent consideration or TO cash Ale $110000 10000 Workings: * Thrice (3) x faverage income of $ 82000 - $32000) less $40000 liability already recorded - a) calculation of Average average income: income = $69.000 + $81000+ $96000 = 82000 (2) Shares issued = $ 76000 = 12667 Shares 96 pershare Since the increased record the contingency and cash 12667 is settled in shares is not changed. additional shaves issued goodwill is not The entry to is as follows: $50668 paid in capital in excess of par ale or so common stock (+4 par) 30668 12667 Shares & $4 per share = $50668

(3) $25000 paid in To capital in exess of par All Dr common Stock ($4 par) $25000 ] $ 50000 Workings : R$ 100.000 ²4 Deficiency [($10-$8)x 25000 shares Divide by four value Added number of shares 6250 & paid in capital = 6250 Shares &$4 per share a $25000