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Chapter 9: Q40PGB (page 536)

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.

Short Answer

Expert verified

Goodwill: $210,000

Step by step solution

01

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:

Goodwill=Totalpurchaseprice-Marketvalueofassets-Marketvalueofliabilities=$700,000-$1,000,000-$510,000=$210,000

02

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.

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