Prepare The Journal Entry To Record The Acquisition Of Merca ✓ Solved
Prepare the journal entry to record the acquisition of Mercantile
On January 1, 201X, Alaska Corporation acquired Mercantile Corporation's net assets by paying $160,000 in cash. The acquisition necessitates the preparation of a journal entry that reflects the exchange of assets, liabilities, and goodwill associated with the business combination.
Overview of Acquisition
Alaska Corporation's acquisition of Mercantile Corporation involves a cash payment of $160,000, which is essential to understand the journal entry that needs to be recorded. The purpose of this transaction is to reflect Mercantile Corporation's assets and liabilities at fair value immediately before the acquisition.
Journal Entry for the Acquisition
When a corporation acquires another company, it must recognize the fair value of the identifiable assets acquired and liabilities assumed. The formula for calculating goodwill is to subtract the fair value of net identifiable assets from the purchase price. In this case, Alaska Corporation paid a total of $160,000 in cash.
Components of Journal Entry
1. Assets Acquired: These could include cash, accounts receivable, inventories, property, plant, equipment, intangible assets (like goodwill), etc. 2. Liabilities Assumed: These may include accounts payable, notes payable, and other obligations of Mercantile Corporation that will be transferred to Alaska Corporation as part of the acquisition. 3. Calculation of Goodwill: Goodwill can be determined if the purchase price exceeds the fair value of the net identifiable assets.
Example Journal Entry
Assuming Mercantile Corporation has the following fair values before the acquisition:
- Cash: $30,000
- Accounts Receivable: $50,000
- Inventory: $40,000
- Property, Plant, and Equipment: $80,000
- Accounts Payable: $20,000
- Notes Payable: $30,000
To summarize:
- Total Assets: $30,000 (Cash) + $50,000 (Accounts Receivable) + $40,000 (Inventory) + $80,000 (Property, Plant, and Equipment) = $200,000
- Total Liabilities: $20,000 (Accounts Payable) + $30,000 (Notes Payable) = $50,000
- Net Identifiable Assets: $200,000 (Total Assets) - $50,000 (Total Liabilities) = $150,000
- Goodwill: $160,000 (Purchase Price) - $150,000 (Net Identifiable Assets) = $10,000
Journal Entry
Debit:
Cash $30,000
Accounts Receivable $50,000
Inventory $40,000
Property, Plant and Equipment $80,000
Goodwill $10,000
Total Debits: $210,000
Credit:
Accounts Payable $20,000
Notes Payable $30,000
Cash $160,000
Total Credits: $210,000
Conclusion
The journal entry accurately reflects the acquisition of Mercantile Corporation by Alaska Corporation. Each asset and liability is accounted for, ensuring that the financial statements will represent the correct financial position after the acquisition.
References
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- IFRS Foundation. (2010). IFRS 3 Business Combinations. International Financial Reporting Standards.
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