Eliminating entries with negative goodwill


Question 1: Eliminating Entries with Negative Goodwill

Snow Corporation purchased all of Cogner Corporation’s voting shares on January 1, 2002, for $365,000.  At that time Cogner reported common stock outstanding of $80,000 and retained earnings of $130,000.  The book value of Cogner’s assets and liabilities approximated their fair vales, except for land, which had a book value of $80,000 and a fair value of $100,000, and buildings, which had a book value of $220,000 and a fair value of $400,000.  Land and buildings are the only noncurrent assets that Cogner holds.

Required to do:

a. Compute the amount of negative goodwill at the date of acquisition.
b. Give the eliminating entry or entries required immediately following the acquisition to prepare a consolidated balance sheet.

Question 2: Push-Down Accounting

Jefferson Company purchased all of Louis Corporation’s common shares on January 2, 2003, for $789,000.  At the date of combination, Louos’s balance sheet appeared as follow:

Assets

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Cash and Receivables

34,000

 

Current payables

25,000

Inventory

 

165,000

 

Notes Payables

100,000

Land

 

60,000

 

Stockholder's Equity

 

Buildings (net)

250,000

 

Common Stock

200,000

Equipment (net)

320,000

 

Additional Capital

425,000

 

 

 

 

Retained Earnings

79,000

Total

 

829,000

 

Total

 

829,000


The fair values of all Louis’s assets and liabilities were equal to their book values except for its fixed assets.  Louis’s land had a value of $75,000; the buildings, a fair value of $300,000; and the equipment, a fair value of $340,000.

Jefferson Company decided to employ push-down accounting for the acquisition of Louis Corporation.  Subsequent to the combination, Louis continued to operate as a separate company.

Required to do:

a. Record the purchase of Louis’s stock on Jefferson’s books.

b. Present any entries that would be made on Louis’s books related to the business combination, assuming push-down accounting is used.

c. Present, general journal form, all elimination entries that would appear in a consolidation work-paper for Jefferson and its subsidiary prepared immediately following the combination.

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Accounting Basics: Eliminating entries with negative goodwill
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