Question

Bargain Purchase: Sontag Corporation's net assets have fair values as described below.

Answer 1

Answer:

The Pratt Company

1. Schedule of Gain on Acquisition:

Current assets       $250,000

Land                          600,000

Building                  1,000,000

Loans payable        (300,000)

Intangible assets   1,500,000

Total fair value    $3,050,000

Investment cost   (3,000,000)

Gain on acquisition $50,000

2. Pratt's Journal Entry to record the merger:

Debit Assets:

 Current assets       $250,000

 Land                          600,000

 Building                  1,000,000

 Intangible assets   1,500,000

Credit Loans payable $300,000

Credit Cash $3,000,000

CreditGain on acquisition $50,000

To record the merger of Pratt Company and Sontag Corporation.

3. The gain on acquisition now changes to a loss of $25,000, which is treated as acquired Goodwill.

Explanation:

a) Data and Calculations:

Fair values of Sontag Corporation's Net Assets:

Current assets       $250,000

Land                          600,000

Building                  1,000,000

Intangible assets   1,500,000

Loans payable        (300,000)

Total fair value    $3,050,000

Investment cost   (3,000,000)

Gain on acquisition $50,000

Fair values of Sontag Corporation's Net Assets:

Current assets       $250,000

Land                          600,000

Building                  1,000,000

Intangible assets   1,500,000

Loans payable        (300,000)

Contingent liabilities (75,000)

Total fair value    $2,975,000

Investment cost   (3,000,000)

Loss on acquisition $25,000

= Goodwill on acquisition