Question

1. As of January 1, Year One, Company Z has no liabilities and only two tangible...

1. As of January 1, Year One, Company Z has no liabilities and only two tangible assets: a donut maker with a value of $300,000 and a cookie machine with a value of $400,000. Each of these assets has a remaining useful life of ten years and no expected residual value. Company Z also holds patent worth $100,000 with a life span of 5 years. Company A offers $1 million to acquire all of the ownership of Company Z. The owners of Company Z hold out and manage to get $1.2 million in cash.

a. Make the journal entry to be recorded by Company A for this acquisition.

b. What depreciation/ amortization expense will Company A recognize in connection with these acquired assets at the end of Year One?

c. What is the appropriate handling of any goodwill resulting from this transaction?

Business   Accounting   
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Answer #1

a. Journal entry In the books of Company A for Acquisition.

1. Donut Maker A/c Dr. 3,00,000

Cookie Machine A/c Dr. 4,00,000

Patent A/c Dr. 1,00,000

  Goodwill A/c Dr. 4,00,000

To Liquidator of Company Z 12,00,000

(Being The business of Company Z acquired for 1.2 Million)

2. Liquidator of Company Z A/c Dr. 12,00,0000

To Cash Account 12,00,0000

( Amount of consideration Paid to Liquidator of Company Z)

b. Amount of depriciation/ amortisation exp. for the Year one.

1. Depriciation for Tangible assets:-

Depriciable value of tangible assets/ Remaining life of assets

7,00,000/10=70,000

2. Amortisation of Patents:

value of Patents/ Life of patents

1,00,000/5 = 20,000

c. Goodwill of 4,00,000, (12,00,000-8,00,000) Excess of Purchase consideration over Value of assets, acquired should be recorded as an Asset in the Balance sheet of Company A.

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