Acquisition: Mature Company paid $300,000 cash in exchange for 100% ownership of

Question

Acquisition: Mature Company paid $300,000 cash in exchange for 100% ownership of start-up company. In so doing, Mature co. incurred $50,000 in professional fees. THe book and fair values of Start-up Company's net assets are as follows:                                                  

                                                                     Book Value                 Fair Value

Required:

A. Assume Start-up company will continue to operate as a legal subsidiary of Mature Company; give the journal entry in which Mature Company records the acquisition of Start-up Company.

B. Assume the management of Mature Company will dissolve Start-up Company immediately after this transaction; give the journal entries that would be recordede by the accountantss of Mature Company.

Cash $20,000 $ 20,000 Accounts Receivable 34,000 37,500 Inventory 25,000 25,000 Land 17,500 17,500 Buildings 62,500 80,000 Equipment 90,000 120,000 Accounts Payable (50,000) (50,000)

Explanation / Answer

A) For acquisition of the startup company:

1)    Intercorporate Investment account (Startup co. a/c)Dr. 3,00,000$

To Cash account- 3,00,000$

2)     For incorporating assets into Mature companies books: (at fair values)

Cash account Dr. 20,000$

Accounts receivable Dr. 37,500$

Inventory Dr. 25,000$

Land Dr. 17,500$

Buildings Dr. 80,000$

Equipment Dr. 1,20,000$

Goodwill a/c Dr. 50,000$

              To accounts payable account 50,000$

               To Intercorporate investment account 3, 00,000$

3) For professional fee incurred:

Goodwill account Dr.50,000$

                 To cash account 50,000$

               

B) For Dissolution of Startup company :

Accounts payable account Dr.50,000$

Retained earnings account Dr.2,50,000$

To Cash account 20,000$

To Accounts receivable 37,500$

To Inventory 25,000$

To Land 17,500$

To Buildings 80,000$

To Equipment 1,20,000$

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