Exercise 3 (LO 3, 4) Acquisition with goodwill.

Smyth Company was acquired by Radar Corporation on July 1, 2011. Radar exchanged 60,000
shares of its $5 par stock, with a fair value of $20 per share, for the net assets of Smyth
Company.
Radar incurred the following costs as a result of this transaction:
Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,000
Stock registration and issuance costs. . . . . . . . . . . . . . . 10,000
Total costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,000

The balance sheet of Smyth Company, on the day of the acquisition, was as follows:
Smyth Company
Balance Sheet
July 1, 2011
Assets Liabilities and Equity
Cash . . . . . . . . . . . . . $ 100,000 Current liabilities . . . . . . . . . . $ 80,000
Inventory . . . . . . . . . . 300,000 Bonds payable . . . . . . . . .. ….. 550,000 630,000
Property, plant, and equipment: Stockholders’ equity:
Land . . . . . . . . . . . . . . $200,000 Common stock . . . . . . . . . . . . . $200,000
Buildings (net) . . . . . . 250,000 Paid-in capital in excess of par 100,000
Equipment (net) . . . . .200,000 650,000 Retained earnings . . . . . .. . . . 120,000 420,000
Total assets . . . . . . . . . . . . .. . $1,050,000 Total liabilities and equity . . . . . . . . . $1,050,000

The appraised fair values as of July 1, 2011, are as follows:

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410,000
Record the acquisition of Smyth Company on the books of Radar Corporation.
Price paid = 60,000 shares x 20 $ market value = 1,200,000

- FV of net assets:
Cash = 100,000
Inventory = 250,000
Land = 180,000
Building = 300,000
Equipment = 220,000
Current liabilities = (80,000)
Bonds payable = (410,000)
Total FV of net assets = 560,000
Goodwill = 640,000

Account Dr. Cr.

Cash 100,000
Inventory 250,000
Land 180,000
Building 300,000
Equipment 220,000
Discount on bonds 140,000
Goodwill 640,000
Current liabilities 80,000
Bonds payable 550,000
Common stocks 300,000
(60,000 shares x 5 par)
Additional paid in capital in excess of par 900,000
(60,000 shares x 15)

Acquisition expense 25,000

Additional paid in capital in excess of par 10,000
Cash 35,000
Exercise 6 (LO 4) Measurement period. Avery Company acquired the net assets of Iowa
Company on July 1, 2011. The net assets acquired include plant assets that are provisionally
estimated to have a fair value of $600,000 with a 10-year usable life and no salvage value.
Depreciation is recorded based on months in service. The remaining unallocated amount of the
price paid is $300,000, which is recorded as goodwill.
At the end of 2011, Avery prepared the following statements (includes Iowa Company for the
last six months):
Balance Sheet

Current assets . . . . . . . . . . . . . . $ 300,000 Current liabilities . . . . . . . . . . . . . . $ 300,000

Equipment (net) . . . . . . . . . . . . . 600,000 Bonds payable . . . . . . . . . . . . . . . 500,000
Plant assets (net). . . . . . . . . . . . . 1,600,000 Common stock ($1 par). . . . . . . . . 50,000
Goodwill . . . . . . . . . . . . . . . . . . 300,000 Paid-in capital in excess of par . . .1,300,000
Retained earnings . . . . . . . . . . . . 650,000
Total assets. . . . . . . . . . . . . . . $2,800,000 Total liabilities and equity . . . . $2,800,000

Summary Income Statement

Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $800,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $280,000
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000 230,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,000

In March 2012, the final estimated fair value of the acquired plant assets is $700,000 with no
change in the estimate of useful life or salvage value.
1. Prepare any journal entries required in March 2012.
2. Prepare the revised balance sheet and income statement for 2011 that will be included in the
2012 comparative statements.
Answer: 1.
Final fair value of Net assets = 700,000
Provisional fair value of net assets = (600,000)
Net increase = 100,000
Plant Assets 100,000
Goodwill 100,000

Depreciation on final cost (700,000/10 years) = 70,000

Depreciation on provisional value (600,000/10 years) = 60,000
Annual increase in depreciation = 10,000
Adjustment for half year $5,000
Retained Earnings (increase depreciation for half year) 5,000
Plant Assets (because they are shown net of 5,000
depreciation

2.

Balance Sheet (Revised)

Current assets . . . . . . . . . . . . . . $ 300,000 Current liabilities . . . . . . . . . . . $ 300,000

Equipment (net) . . . . . . . . . . . . . 600,000 Bonds payable . . . . . . . . . . . . . . 500,000
Plant assets (net). . . . . . . . . . . . . 1,695,000 Common stock ($1 par). . . . . 50,000
Goodwill . . . . . . . . . . . . . . . . . . 200,000 Paid-in capital in excess of par . 1,300,000
Retained earnings . . . . . . . . . 645,000
Total assets. . . . . . . . . . . . . . . $2,795,000 Total liabilities and equity…..$2,795,000
Summary Income Statement (Revised)

Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $800,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $280,000
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000 235,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,000
Exercise 5 (LO 4) Contingent consideration. Gull Company purchased the net assets of Hart
Company on January 1, 2011, and made the following entry to record the purchase:
Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Common Stock ($1 par). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Paid-In Capital in Excess of Par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520,000
Make the required entry on January 1, 2013, for contingency agreement:
1. An additional cash payment would be made on January 1, 2013, equal to twice the amount by
which average annual earnings of the Hart Division exceed $25,000 per year, prior to January 1,
2013. Net income was $50,000 in 2011 and $60,000 in 2012. Assume that the liabilities recorded
on January 1, 2011, include an estimated contingent liability recorded at an estimated amount of
$40,000.

Answer:
The condition is that Gull company is going to pay twice what exceeds the average Net income
Goodwill 40,000
Loss on Estimated Contingent Consideration 20,000
Estimated Contingent Consideration 60,000
50,000+ 60,000
2x( ¿−25,000
2

 The contingent consideration is calculated as twice what exceeds the average net income
50,000+ 60,000
 Therefore, We are going to calculate the average net income = = 55,000
2
 Estimated Contingent Consideration = 2 × ($55,000 – $25,000) = 60,000
 Then we are going to remove $40,000 liability already recorded= 2 × ($55,000 – $25,000) –
40,000 = 20,000 will be recorded as Loss on Estimated Contingent Consideration as it is
recorder after the measurement period is over.