Question

South Company purchased North Company. South Company paid $550,000 cash and assumed all of North Company’s liabilities. On the date of purchase, North’s books showed tangible assets of $500,000, liabilities of $20,000, and equity of $480,000. An appraiser assessed the fair market value of the tangible assets at $530,000 on the acquisition date. Which of the following journal entries would be required to record the purchase of North Company on South Company’s books?

Answer 1

Answer:

Explanation:

The journal entry is shown below:

Assets A/c Dr $530,000

Goodwill A/c Dr $40,000

        To Liabilities A/c $20,000

        To Cash A/c $550,000

(Being the purchase is recorded and the remaining amount would be debited to the goodwill account)

The goodwill amount is computed below:

= Liabilities + cash paid -  fair market value of the tangible assets

= $20,000 + $550,000 - $530,000

= $570,000 - $530,000

= $40,000