Problem 2-25 (LO 2-5, 2-6a, 2-6b, 2-8) On May 1, Soriano Co. reported the follow

Question

Problem 2-25 (LO 2-5, 2-6a, 2-6b, 2-8) On May 1, Soriano Co. reported the following account balances along with their estimated fair values Carrying Amount Receivables Inventory Copyrights Patented technology Total assets Current liabilities Long-term liabilities Common stock Retained earnings Total 1iabilities and equities Fair Value 221,500 221, 500 81,000 496, 500 610,000 1,268,000 $1,409,000 186,000 186,000 704,000 81,000 131,500 834,000 714, 000 100,000 268,000 1,268, 000 On that day, Zambrano paid cash to acquire all of the assets and llabilities of Soriano, which will cease to exist as a separate entity. To facilitate the merger, Zambrano also paid $148,500 to an investment banking firm The following information was also available Zambrano further agreed to pay an extra $73,000 to the former owners of Soriano only if they meet certain revenue goals during the next two years. Zambrano estimated the present value of its probability adjusted expected payment for this contingency at $36,500. Soriano has a research and development project in process with an appraised value of $232,500. However, the project has not yet reached technological feasibility and the project's assets have no alternative future use . . a&b.; Prepare Zambrano's journal entries to record the Soriano acquisition assuming its initial cash payment to the former owners was (a) $692,900 & (b) $817,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Explanation / Answer

1 Calculation of Net Assets Acquired: (acquisition values are at fair values) $ Receivables              221,500 Inventory                81,000 Copyrights              496,500 Patented technology              610,000 Total Assets          1,409,000 Less: Liabilities at fair value Current liabilities              186,000 Long term liabilities              704,000 Total Liabilities              890,000 Net Assets (Total asset- Tot liab)              519,000 Fee paid to merchant banker              148,500 2 Purchase consideration paid to Soriano owners: Option 1 Option 2 Payment made              692,900          817,000 Net assets acquired              519,000          519,000 Good will (excess payment over net assets)              173,900          298,000 3 Payment expected to be made after 2 years, if revenue goals are attained $        73,000 Present value of contingent payment made as above $        36,500 4 R&D project value in process $         232,500 Journal entries in the books of Zambrano: (under option 1) Debit $ Credit $ 1 Business purchase account 692900    Owners of Soriano 692900 (being consideration payable for business purchase) 2 Receivables              221,500 Inventory                81,000 Copyrights              496,500 Patented technology              610,000 Goodwill              173,900           Current liabilities          186,000           Long term liabilities          704,000           Business purchase account          692,900 (various assets taken over and goodwill recorded ) 3 Owners of Soriano 692900    Cash 692900 (being cash paid for acquisition of the business) 4 Business acquisition expense 148500      Cash 148500 (expenses paid to merchant bankers) (this amount can be adjusted in Retained earnings account) Note: 1 the amount payable to owners on reaching revenue target is a contingent payment. It is not recorded, as it is not a liability. Hence, this contingent payment (present value of payable) is disclosed as a foot note to the balance sheet. 2 R&D expense which has not reached technical feasibility is not recorded in the books of acquiring company

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