Question

Assume an investor purchases the net assets of an investee for the cash purchase price is $75,600. The investor is willing to purchase the investee's business for this amount because the fair value of PPE is $70,560 and the fair value of a (previously unrecognized) customer list is $15,120 (the fair values of all other assets and liabilities are equal to their book values). The investee company reports the following balance sheet on the acquisition date:

Cash $2,800 Accounts payable $5,600
Accounts receivable 5,600 Accrued liabilities 8,400
Inventories 11,200 -
Current assets 19,600 Current liabilities 14,000
Long-term liabilities 11,200
PPE, net 28,000 Stockholdersâ equity 22,400
Total assets $47,600 Total liabilities and equity $47,600

Required:
Provide the journal entry if the investor pays cash and purchases the assets and assumes the liabilities of the investee company (assume that the fair value of the assets is equal to their book values).

Answer 1

Answer and Explanation:

The journal entry is given below;

Cash $2,800

Account receivable $5,600

Inventories $11,200

PPE $28,000

To Account payable $5,600

To Accrued liabilities $8,400

To Long term liabilities $11,200

To Cash $22,400

(Being the cash is paid is recorded)

Here all the assets are debited as it increased the assets and credited all the liabilities except cash as it increased the liabilities and the remaining balance left would be credited to cash account