Question - On June 30, 2011, Sampras Company reported the following account balances:
Receivables $ 80,000 Current liabilities $ (10,000 )
Inventory 70,000 Long-term liabilities (50,000 )
Buildings (net) 75,000 Common stock (90,000 )
Equipment (net) 25,000 Retained earnings (100,000 )
Total assets $ 250,000 Total liabilities and equities $ (250,000 )
On June 30, 2011, Pelham paid $300,000 cash for all assets and liabilities of Sampras, which will cease to exist as a separate entity. In connection with the acquisition, Pelham paid $10,000 in legal fees. Pelham also agreed to pay $50,000 to the former owners of Sampras contingent on meeting certain revenue goals during 2012. Pelham estimated the present value of its probability adjusted expected payment for the contingency at $15,000.
In determining its offer, Pelham noted the following pertaining to Sampras:
It holds a building with a fair value $40,000 more than its book value.
It has developed a customer list appraised at $22,000, although it is not recorded in its financial records.
It has research and development activity in process with an appraised fair value of $30,000. However, the project has not yet reached technological feasibility and the assets used in the activity have no alternative future use.
Book values for the receivables, inventory, equipment, and liabilities approximate fair values.
(a) Prepare Pelhams accounting entry to record the combination with Sampras using the acquisition method.
(b) Prepare Pelhams accounting entry to record the combination with Sampras using the purchase method.