Question

# EXERCISE 5-1 Allocation of Cost LO 1 LO 3 On January 1, 2018, Pam Company purchased...

EXERCISE 5-1 Allocation of Cost LO 1 LO 3

On January 1, 2018, Pam Company purchased an 85% interest in Shaw Company for \$540,000. On this date, Shaw Company had common stock of \$400,000 and retained earnings of \$140,000. An examination of Shaw Company’s assets and liabilities revealed that their book value was equal to their fair value except for marketable securities and equipment: Book Value Fair Value Marketable securities \$ 20,000 \$ 45,000 Equipment (net) 120,000 140,000 Required: Prepare a Computation and Allocation Schedule for the difference between book value of equity acquired and the value implied by the purchase price. Determine the amounts at which the above assets (plus goodwill, if any) will appear on the consolidated balance sheet on January 1, 2018.

 Book Value of Shaw Company (Com.stock + RE) = (400000+140000) \$ 540,000 (+) Excess of fair value of mkt.sec. over book value (45000-20000) \$ 25,000 (+) Excess of fair value of equip over book value (140000-120000) \$ 20,000 Fair value of net assets of Shaw company \$ 585,000 Fair value of net assets acquired (585000×85%) \$ 497,250

Hence, goodwill on acquisition is calculated as Consideration paid (-) Fair value of net assets acquired = 540000-497250 = \$ 42,750

Hence, the assets will appear as follows-

 Marketable securities \$ 45,000 Equipment (net) \$ 140,000 Goodwill \$ 42,750

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