Fugate Energy Corp has recently purchased a small local company, Gleave Inc, for $556,950 cash.
Fugate Energy Corp's chief accountant has been given the assignment of preparing the journal entry to record the purchase. An investigation disclosed the following information about the assets of Gleave Inc.
1) Gleave Inc owned land and a small manufacturing building. The book value of the property on Gleave's records was $115,000. An appraisal for fire insurance purposes had been made during the year. The building was appraised by the insurance company at $175,000. Property tax assessment notices showed that the building's worth was five times the worth of the land.
2) Gleave's equipment had a book value of $75,000. It is estimated by Gleave that it would take six times the amount of book value to replace the old equipment with new equipment. The old equipment is, on average, 50% depreciated.
Evaluate each of these items and prepare the journal entry that should be made to record the purchase on Energy's books. (Note: Geave has no liabilities)
When you buy another business, you ignore their book values. You record what you bought at the fair value of the assets identified and then the difference between the sum of the fair values and the purchase price, if any, is goodwill.
This is a crowded question because it is full of "distractors," data you don't need. Like how depreciated the assets were on the prior books. Not relevant. Book values. Again, don't need. Instructors put in distractors to see if you know how to do the work. Those that know, can overlook distractors. So, don't be afraid to turn a blind eye to distractors! You don't always need to use every number.
Data on how the seller was recording the asset is not relevant. When you buy a business, you do not look to their balance sheet to figure out how to record the newly purchased business! You look to your purchase price! When you buy a home, you look to your purchase price, not what the ...
This discussion instructs on where goodwill comes from (and why) and gives a journal entry example to illustrate. Codification reference given for how to handle negative goodwill.