Q40PGB - Horngren'S Financial And Managerial Accounting

Question

Core Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Core purchased goodwill as part of the acquisition of Surety Wireless Company, which had the following figures:

 

                                          Book value of assets           \( 700,000

                                          Market value of assets         1,000,000

                                          Market value of liabilities        510,000

 

Requirements

1. Journalize the entry to record Core’s purchase of Surety Wireless for \)280,000 cash plus a $420,000 note payable.

2. What special asset does Core’s acquisition of Surety Wireless identify? How should Core Telecom account for this asset after acquiring Surety Wireless? Explain in detail.

Step-by-Step Solution

Answer

Goodwill: $210,000

Step 1: Journal entry for purchase of business

Date	Particular	Debit	Credit
Jan 1.	Assets	$ 1,000,000
	Goodwill	210,000
	To Notes Payable		$ 420,000
	To Liabilities		510,000
	To Cash		280,000
	Being business purchased for more than market value

Working:

$\begin{array}{rcl}\mathrm{Goodwill}& =& \mathrm{Total} \mathrm{purchase} \mathrm{price}-\left(\mathrm{Market} \mathrm{value} \mathrm{of} \mathrm{assets}-\mathrm{Market} \mathrm{value} \mathrm{of} \mathrm{liabilities}\right)\\ & =& \$700,000-\left(\$1,000,000-\$510,000\right)\\ & =& \$210,000\end{array}$

Step 2: Treatment of special asset

By purchasing the business of “surety wireless company” special asset of “Goodwill has been identified. This goodwill is the difference between the purchasing cost and the net market value of the business.   

 

Treatment of this goodwill would be that it would be reported in the balance sheet on the asset side. This is an intangible asset but it would not be amortized. However, its fair value would be impaired each year. If its value fair value decreases then the impairment loss would be recorded and the fair value would be adjusted.