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Chapter 9: Q13SE (page 528)

Accounting for goodwill

Decca Publishing paid \(230,000 to acquire Thrifty Nickel, a weekly advertising paper. At the time of the acquisition, Thrifty Nickel’s balance sheet reported total assets of \)130,000 and liabilities of \(70,000. The fair market value of Thrifty Nickel’s assets was \)100,000. The fair market value of Thrifty Nickel’s liabilities was $70,000.

Requirements

  1. How much goodwill did Decca Publishing purchase as part of the acquisition of Thrifty Nickel?
  2. Journalize Decca Publishing’s acquisition of Thrifty Nickel

Short Answer

Expert verified

Decca Publishing will report $200,000 as the amount paid for goodwill under the acquisition of Thrifty Nickel.

Step by step solution

01

Meaning of Intangible Assets

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

02

Calculation of value of the acquisition of Goodwill of Thrifty Nickel

Particulars

Amount ($)

Amount ($)

Purchase price of acquisition

$230,000

Market Value of Thrifty Nickel’s assets

$100,000

Less: Market Value of Thrifty Nickel’s Liabilities

(70,000)

Market Value of Thrifty Nickel’s Net Assets

30,000

Goodwill

$200,000

03

Statement showing a journal entry

Date

Particulars

Debit ($)

Credit ($)

Assets

1,00,000

Goodwill

2,00,000

Liabilities

70,000

Cash

2,30,000

( To record purchase of Thrifty Nickel )

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Most popular questions from this chapter

Journalizing natural resource depletion

Cannon Mountain Mining paid \(462,300 for the right to extract mineral assets from a 400,000-ton deposit. In addition to the purchase price, Cannon also paid a \)900 filing fee, a \(1,800 license fee to the state of Nevada, and \)55,000 for a geological survey of the property. Because Cannon purchased the rights to the minerals only and did not purchase the land, it expects the asset to have zero residual value. During the first year, Cannon removed and sold 50,000 tons of the minerals. Make journal entries to record (a) purchase of the minerals (debit Minerals), (b) payment of fees and other costs, and (c) depletion for the first year.

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

Arca Salvage, Inc. purchased equipment for \(10,000. Arca recorded total depreciation of \)8,000 on the equipment. Assume that Arca exchanged the old equipment for new equipment, paying \(4,000 cash. The fair market value of the new equipment is \)5,000. Journalize Arca’s exchange of equipment. Assume this exchange has commercial substance.

Jim Reed manages a fleet of utility trucks for a rural county government. He’s been in his job for 30 years, and he knows where the angles are. He makes sure that when new trucks are purchased, the residual value is set as low as possible. Then, when they become fully depreciated, they are sold off by the county at residual value. Jim makes sure his buddies in the construction business are first in line for the bargain sales, and they make sure he gets a little something back. Recently, a new county commissioner was elected with vows to cut expenses for the taxpayers. Unlike other commissioners, this man has a business degree, and he is coming to visit Jim tomorrow.

Requirements

1. When a business sells a fully depreciated asset for its residual value, is a gain or loss recognized?

2. How do businesses determine what residual values to use for their various assets? Are there “hard and fast” rules for residual values?

3. How would an organization prevent the kind of fraud depicted here?

Question: P9-36B Determining asset cost and recording partial-year depreciation

Safe Parking, near an airport, incurred the following costs to acquire land, make land improvements, and construct and furnish a small building:

a

Purchase price of three acres of land

$86,000

b

Delinquent real estate taxes on the land to be paid by safe parking

6,300

c

Additional dirt and earth removing

8,400

d

Title insurance and the land acquisition

3,400

e

Fence around the boundary of the property

9,600

f

Building permit for building

900

g

Architect’s fee for design of building

20,100

h

Signs near the front of property

9,000

i

Material used to construct the building

217,000

J

Labor to construct the building

172,000

k

Interest cost on construction loan for the building

9,500

l

Parking lots on the property

29,400

m

Lights for parking lots

11,600

n

Salary of construction supervisor(80% to building; 20% to parking lot and concrete walks)

80,000

o

Furniture

11,700

p

Transportation of furniture from seller to the building

1,900

q

Additional fencing

6,900

Safe Parking depreciates land improvements over 15 years, buildings over 40 years, and furniture over 10 years, all on a straight-line basis with zero residual value.

Requirements

1. Set up columns for Land, Land Improvements, Building, and Furniture. Show how to account for each cost by listing the cost under the correct account. Determine the total cost of each asset.

2. All construction was complete and the assets were placed in service on September 1. Record partial-year depreciation expense for the year ended December 31. Round to the nearest dollar.
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