Q40PGB_1 - 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 cashplus a $420,000 note payable.

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

Step-by-Step Solution

Answer

Goodwill is $210,000

Step 1: Meaning of Intangible Asset

The assets that increase the value of the business organization even without physical existence are known as intangible assets. Goodwill and patents are some of the intangible assets. 

Step2: Journal entry for purchase of business

Date	Particulars	Debit ($)	Credit ($)
Jan 1	Assets	1,000,000
	Goodwill	210,000
	Notes Payable		420,000
	Liabilities		510,000
	Cash		280,000
	(To record the purchase of business)

 

Working note:

 $\begin{array}{c}Goodwill=TotalPurchaseprice-\left(Marketvalueofassets-Marketvalueofliabilities\right)\\ =\$700,000-\left(\$1,000,000-\$510,000\right)\\ =\$210,000\end{array}$

Step 3: Treatment of special asset

Core Telecom will identify goodwill on the acquisition of Surety wireless company. This goodwill arises because core has paid an amount of consideration that is more than the market value of the net assets of the Sheldon wireless. 

Core Telecom will report goodwill of $210,000 on the balance sheet.