Problem 1-13 (104, 6) Contingent consideration. Duko Corporation is acquiring th

Question

Problem 1-13 (104, 6) Contingent consideration. Duko Corporation is acquiring the bet assets, exclusive of cash, of Weber Company as of January 1, 2015, at which time Weber Company's balance sheet is as follows: Assets Current assets: $30,000 50,000 Cash $ 80,000 Accounts receivable. Investments in marketable securities Buildings (net). Goodwill Noncurrent assets $120,000 600,000 450,000 800,000 100,000 . . 2,070,000 $2,150,000 Total assets . .. Liabilities and Stockholders' Equity Current liabilities: Accounts payable Income tax payable $ 150,000 190,000 340,000o Equity: $1,200,000 610,000 1,810,000 $2,150,000 Total liabilities and equity Duko Corporation feels that the following fair values should be used for Weber's book values: $30,000 60,000 150,000 450,000 450,000 600,000 120,000 190,000 Cash (no change) Accounts receivable Land. Buildings (no change) . Accounts payable . Income tax payable (no change)....

Explanation / Answer

Fair Value of the Net Assets Taken=

Accounts Receivable=60,000
Investments = 150000
Land =450000
Building = 450000
Equipment= 600000
Accounts payable = (120000)
Income tax liability= (190000)

Net assets = $ 1,400,000

Purchase Consideration paid by Duke corporation= 20,000* $60 = $ 1,200,000

So income i.e bargain purchase = 200,000

Estimated settlement amount = 20,000 will be through equity.

Now journal entries would be:-

1) Business purchase Debit 1,200,000
Weber company Credit 1,200,000

2) Accounts Receivable Debit 60,000
Investments Debit 150000
Land Debit 450000
Building Debit 450000
Equipment Debit600000
Accounts payable Credit 120000
Income tax liability Credit 190000
Business Purchase Credit 1,200,000
Bargain on purchase 200,000

3) Weber company Debit 1,200,000
Common stock Credit 40,000
Retained Earnings Credit 1,160,000

On january 1 2017, fair value of duke stock = 57.50

So compensation payable = 20000* (60-57.5)
=$50,000

Journal entry would be

Compensation expense Debit 50,000
Equity common stock and retained earning Credit 50,000

20,000 will be adjusted with this balance of 50,000 in the books of account

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