Discuss and answer the questions regarding two of the cases listed below in deta

Question

Discuss and answer the questions regarding two of the cases listed below in detai

A.   Is There Any Goodwill?

Fugate Energy Corp. has recently purchased a small local company, Gleave Inc., for $556,950 cash. Fugate’s CFO has been given the assignment of preparing the journal entry to record the purchase. An investigation disclosed the following information about the assets of Gleave Inc.:

1. Gleave owned land and a small manufacturing building. The book value of the property on Gleave’s records was $115,000. An appraisal for fire insurance purposes had been made during the year. The building was appraised by the insurance company at $175,000. Property tax assessment notices showed that the building’s worth was five times the worth of the land.

2. Gleave’s equipment had a book value of $75,000. It is estimated by Gleave that it would take six times the amount of book value to replace the old equipment with new equipment. The old equipment is, on average, 50% depreciated.

3.Gleave had a franchise to produce and sell solar energy units from another company in a set geographic area. The franchise was transferred to Fugate as part of the purchase. Gleave carried the asset on its books at $40,00, the unamortized balance of the original cost of $90,000. The franchise is for an unlimited time. Similar franchises are now being sold by the company for $120,000 per geographic area.

4. Gleave had two excellent research scientists who were responsible for much of the company’s innovation in product development. Each is paid $150,000 per year by Gleave. They have agreed to work for Fugate Energy at the same salary.

5. Gleave held two patents on its products. Both had been fully amortized and were not carried as assets on Gleave’s books. Gleave believes they could have been sold separately for $75,000 each

Evaluate each of these items and prepare the journal entry that should be made to record the purchase on Fugate’s books. (Note: Gleave has no liabilities).

Explanation / Answer

Building 95833 115000 Equipment book value 75000 Replacement cost 225000 Journal entry Land Debit 19167 Building Debit 95833 Equipment Debit 225000 Goodwill Debit 216950 Cash Credit 556950 Purchase of Gleave Inc. for cash. Purchase price 556950

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