Question

Problem 2-35 (LO 2-9) In a pre-2009 business combination, Acme Company acquired all of Brem Company's assets and liabilities for cash. After the combination Acme formally dissolved Brem. At the acquisition date, the following book and fair values were available for the Brem Company accounts: Book Values $ 68,400 148,000 Current assets Equipment Trademark Liabilities Common stock Retained earnings Fair Values $ 68,400 226,000 339,000 (71,400) (71,400) (100,000) (45,000) In addition, Acme paid an investment bank $28,700 cash for assistance in arranging the combination. a. Using the legacy purchase method for pre-2009 business combinations, prepare Acme's entry to record its acquisition of Brem in its accounting records assuming the following cash amounts of $674,100 and $444,100 were paid to the former owners of Brem. b. How would these journal entries change if the acquisition occurred post-2009 and therefore Acme applied the acquisition method?

Answer 1

1.

When the Cash Amount Paid to Former Owners is $674,100

The journal entry is prepared as below:

Transaction	General Journal	Debit	Credit
1	Current Assets	$68,400
	Equipment	$226,000
	Trademark	$339,000
	Goodwill	$140,800
	Liabilities		$71,400
	Cash (674,100 + 28,700)		$702,800

______

Notes:

The value of goodwill is calculated as below:

Goodwill = (Cash Amount + Acquisition Costs) - (Fair Value of Net Assets Acquired) = (674,100 + 28,700) - (68,400 + 226,000 + 339,000 - 71,400) = $140,800

______

2.

When the Cash Amount Paid to Former Owners is $444,100

The journal entry is prepared as below:

Transaction	General Journal	Debit	Credit
1	Current Assets	$68,400
	Equipment (226,000 - 35,680)	$190,320
	Trademark (339,000 - 53,520)	$285,480
	Liabilities		$71,400
	Cash (425,100 + 28,700)		$453,800

______

Notes:

The value of bargain purchase is calculated as below:

Bargain Purchase = (Cash Amount + Acquisition Costs) - (Fair Value of Net Assets Acquired) = (444,100 + 28,700) - (68,400 + 226,000 + 339,000 - 71,400) = -$89,200

The amount of bargain purchase is allocated to long term assets as follows:

Asset	Fair Value	Weight (A)	Total Amount of Reduction (B)	Asset Reduction (A*B)
Equipment	226,000	40% [226,000/(226,000+339,000)*100]	89,200	$35,680
Trademark	339,000	60% [339,000/(226,000+339,000)*100]	89,200	$53,520

______

3 and 4.

When the Cash Amount Paid to Former Owners is $674,100

The journal entries are prepared as below:

Transaction	General Journal	Debit	Credit
1	Current Assets	$68,400
	Equipment	$226,000
	Trademark	$339,000
	Goodwill	$112,100
	Liabilities		$71,400
	Cash		$674,100
2	Professional Service Expense	$28,700
	Cash		$28,700

______

Notes:

The value of goodwill is calculated as below:

Goodwill = Consideration Transferred - (Fair Value of Net Assets Acquired) = 674,100 - (68,400 + 226,000 + 339,000 - 71,400) = $112,100

______

5 and 6.

When the Cash Amount Paid to Former Owners is $444,100

The journal entries are prepared as below:

Transaction	General Journal	Debit	Credit
1	Current Assets	$68,400
	Equipment	$226,000
	Trademark	$339,000
	Gain on Bargain Purchase		$117,900
	Liabilities		$71,400
	Cash		$444,100
2	Professional Service Expense	$28,700
	Cash		$28,700

______

Notes:

The amount of gain on bargain purchase is arrived as follows:

Gain on Bargain Purchase = Consideration Transferred - (Fair Value of Net Assets Acquired) = 444,100 - (68,400 + 226,000 + 339,000 - 71,400) = -$117,900