Purchase of Intangible Assets in a Business Acquisition
Cossack Company purchased Village Enterprises. The following fair values were associated with the items acquired in this business acquisition:
|
|
Cost
|
Fair Value
|
|
Accounts receivable
|
$ 200,000
|
$ 200,000
|
|
Inventory
|
100,000
|
50,000
|
|
Government contacts
|
0
|
100,000
|
|
Equipment (net)
|
40,000
|
50,000
|
|
Short-term loan payable
|
(200,000)
|
(200,000)
|
|
Net assets
|
$ 140,000
|
$ 200,000
|
The fair value associated with Village Enterprises' government contacts is not based on any legal or contractual relationship. In addition, for obvious reasons, there is no open market trading for intangibles of this sort.
1. Make the journal entry necessary for Cossack Company to record the purchase if the purchase price is $900,000 cash.
2. Assume that the purchase price is $35,000 cash. Make the journal entry necessary to record the purchase.