Business Combination: Purchase of Net Assets Example

On December 31, 2020, the statements of financial position of Purchase Corp. and Target Corp. are as follows:

Purchase Corp. Target Corp.

Cash $ 400,000 $ 780,000
Accounts receivable $ 1,600,000 $ 2,000,000
Inventories $ 1,000,000 $ 520,000
Plant and Equipment (net) $ 3,500,000 $ 5,450,000
Total Assets $ 6,500,000 $ 8,750,000

Current Liabilities $ 600,000 $ 310,000

Long-term liabilities $ 900,000 $ 610,000
Common shares $ 2,500,000 $ 1,000,000
Retained earnings $ 2,500,000 $ 6,830,000
Total Liabilities and Equity $ 6,500,000 $ 8,750,000

Purchase Corp. has 100,000 common shares outstanding, and Target Corp. has 45,000 shares outstanding.
On January 1, 2021, Purchase Corp. issues an additional 90,000 common shares to Target Corp. at $100 per
share, in return of all of the assets and liabilities of that company. Target Corp. distributes
Purchase Corp's common shares to its shareholders in return for thier outsanding common shares and
ceases to exist as a seperate legal entity. At the time of this transaction, the cash, accounts
recievable, inventories, and current liabilities of both companies have their fair values equal to their
carrying values. The plant and equipment and long-term liabilities have fair values as follows:

Purchase Corp. Target Corp.

Plant and Equipment (net) $ 3,900,000 $ 5,450,000
Long-term liabilities $ 600,000 $ 510,000

In addition, Target Corp has a patent worth $ 110,000

Required
(a) What is the amount of goodwill that would be recorded for this business combination?
(a) Prepare the Statement of Financial Position at January 1, 2021, for Purchase Corp.
 get Corp. are as follows:

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get Corp. at $100 per
t Corp. distributes
mmon shares and
e cash, accounts
equal to their
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 Purchase Corp.
STEP 1: Identify Acquirer Purchase Corp SFP on December 31, 2020 Pucrhase Journal Entry SFP on January 1, 2021
Cash 400,000 780,000 1,180,000
STEP 2: Determine Acquisition
Date January 1,2021 Accouts Recievable 1,600,000 2,000,000 3,600,000
Price on Jan 1 Inventories 1,000,000 520,000 1,520,000
STEP 3: Calculate FV of Purchase
Consideration 90,000 $100 $ 9,000,000 Plant & Equipment 3,500,000 5,450,000 8,950,000
Patent 110,000 110,000
Goodwill 960,000 960,000
STEP 4: Recognize & Measure
the Identifiable Net Assets Identifiable Net Assets Fair Values TOTAL ASSETS 6,500,000 16,320,000
Cash $ 780,000
Accouts Recievable $ 2,000,000 Current Liabilities 600,000 310,000 910,000
Inventories $ 520,000 Longterm Liabilities 900,000 510,000 1,410,000
Plant & Equipment $ 5,450,000 Common Shares 2,500,000 9,000,000 11,500,000
Patent $ 110,000 Retained Earnings 2,500,000 2,500,000
Current Liabilities $ (310,000) TOTAL LIABILITIES & EQUITIES 6,500,000 16,320,000
Longterm Liabilities $ (510,000)

TOTAL Identifiable Net Assets $ 8,040,000 To Record Purchase of Net Assets of Succeed Debits Credits
Cash 780,000
Accouts Recievable 2,000,000
Inventories 520,000
STEP 5: Calculate Goodwill Goodwill = Purchase Price - FV of Indentifiable Net Assets Plant & Equipment 5,450,000
960,000 9,000,000 8,040,000 Patent 110,000
Current Liabilities 310,000
Longterm Liabilities 510,000
Goodwill 960,000
Common Shares 9,000,000

Journal Entry Check -