Answer:
<em>Preparation of Journal Entries</em>
<u>Date Particulars Dr($) Cr($</u>)
January 3, 20x2 Cash & Receivables 57,000
Inventory 165,000
Buildings & Equipment 307,000
Patent 203,000
Account Payable 20,000
Purchase Consideration 632,000
Gain on Purchase Bargain 80,000
<em> (Being purchase of Lark</em>
<em> Corporation`s net assets) </em>
<em />
<em>Recording of merger costs.</em>
(Debit) Cash $9,000
(Credit) Merger Expenses $9,000
Recording of acquisition of Lark Corporation`s net assets
(Debit) Investment in Lark`s net asset $712,000
(Credit) Cash $632,000
(Credit) Gain on Purchase Bargain $80,000
<em />
Explanation:
When acquiring another business, net asset (Total Assets - Total Liabilities) is valued at fair value (sometimes called market value, not book value. Hence, the reason why the fair value of Lark`s assets and liabilities was used in the calculation above. So the net assets ($57,000+$165,000+$307,000+$203,000 - $20,000) = $712,000.
After, calculating the net assets of the Lark, the purchase consideration given by Bower Company has to be removed from the net asset, in order to get the goodwill or gain on purchase bargain on the acquisition. The formula is Purchase consideration - Net assets of the target company = Goodwill (Gain on purchase bargain). If the purchase consideration is higher than the net assets, then goodwill is obtained. If the purchase consideration is lower than net assets acquired then, gain on purchase bargain is obtained.
In Bower`s case, gain on purchase bargain is obtained because net assets is greater than purchase consideration ($632,000 - $712,000).
<em>Merger cost</em>
Merger cost is not considered as part of purchase consideration. The merger cost is taken to income statement of Bower Corporation as expense.
