Example 10-3: Suppose Big K purchased 8,000 shares (100 percent of shares outsta

Question

Example 10-3: Suppose Big K purchased 8,000 shares (100 percent of shares outstanding) of Little paying $10,000 in cash and issuing (and distributing to Little K's shareholders) 5,000 shares with par value of $1 and total market value of $41,200. The fair value of Little K's identifiable assets/liabilities are as follows: Cash Accounts Receivable 9,000 Long-term Notes Payable 17,000 Inventory Equipment $6,000 Accounts Payable15,000 8,000 45,000 What's the amount ofgoodwill Big K should recognize? What's the journal entry?

Explanation / Answer

Amount of Goodwill Big K Should recognise Amount in $ Amount in $ Consideration Paid cash paid 10000 market value stock issued 41200 51200 Less: net Worth of Little K cash paid 6000 Accouts receivables 9000 Inventory 8000 Equipment 45000 less:Account payables -15000 less: Long term Liabilties -17000 net Worth of Little K 36000 36000 Excess Amount Piad / Goodwill 15200 Journal entry date Accout titles Debit credit cash paid A/c 6000 Accouts receivables a/c 9000 Inventory   A/c 8000 Equipment A/c 45000 Goodwill A/c 15200            To Account payables A/c 15000            To Long term liabilties A/c 17000            To cash A/c 10000             To Common Stock 5000 shares $1 5000             To Additional paid in capital (41200-5000) 36200 (being Excess amount paid for Aquistion has bben recorded as good will)

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