On December 31, 20X8, Mercury Corporation acquired 100 percent ownership of Satu
ID: 2459118 • Letter: O
Question
On December 31, 20X8, Mercury Corporation acquired 100 percent ownership of Saturn Corporation. On that date, Saturn reported assets and liabilities with book values of $300,000 and $100,000, respectively, common stock outstanding of $50,000, and retained earnings of $150,000. The book values and fair values of Saturn's assets and liabilities were identical except for land which had increased in value by $10,000 and inventories which had decreased by $5,000.
1. Based on the preceding information, what amount of differential will appear in the consolidating entries required to prepare a consolidated balance sheet immediately after the business combination, if the acquisition price was $240,000?
a. 0
b. 40,000
c. 25,000
d. 5,000
2. Based on the preceding information, what amount of goodwill will be reported if the acquisition price was $240,000?
a. 0
b. 40,000
c. 15,000
d. 35,000
3. Based on the preceding information, what amount of goodwill will be reported if the acquisition price was $195,000?
a. 0
b. 40,000
c. 15,000
d. 35,000
Explanation / Answer
Net Assets acquired($):-
Book values and fair values of Saturn's Assets - Liabilities + Increase value of land- Decrease value Inventories
= 300000 - 100000 + 10000 - 5000
= 205000
1. Net Increase decrease in Assets= Increase value of land- Decrease value Inventories
= 10000 - 5000
= $5000
Goodwill = Acquisition price - Net Assets acquired
= 240000 - 205000 = $35000
the consolidating entries required to prepare a consolidated balance sheet immediately after the business combination, if the acquisition price was $240,000 is $40000 i.e $35000 +$5000
so the answer is b.
2. goodwill will be reported if the acquisition price was $240,000 is
Goodwill = Acquisition price - Net Assets acquired
= 240000 - 205000 = $35000
so the answer is d.
3. goodwill will be reported if the acquisition price was $195,000 is
Goodwill = Acquisition price - Net Assets acquired
= 195000 - 205000 = $(10000)
here Acquisition price is less than net asset. Thats why Goodwill is getting negative. So $10000 will be charged as capital reserve in balance sheet. In this situation goodwill will be 0.
so the answer is a.
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