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Chapter 9: Q40PGB_1 (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 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

Short Answer

Expert verified

Goodwill is $210,000

Step by step solution

01

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.

02

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:

Goodwill=TotalPurchaseprice−Marketvalueofassets−Marketvalueofliabilities=$700,000−$1,000,000−$510,000=$210,000

03

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.

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Most popular questions from this chapter

What does the word capitalize mean?

What is an intangible asset? Provide some examples

Whitney Plumb Associates surveys American eating habits. The company’s accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated Depreciation account for each asset. During 2018, Whitney Plumb completed the following transactions:

Jan. 1 Purchased office equipment, \(117,000. Paid \)77,000 cash and financed the remainder with a note payable.

Apr. 1 Acquired land and communication equipment in a lump-sum purchase. Total cost was \(350,000 paid in cash. An independent appraisal valued the land at \)275,625 and the communication equipment at \(91,875.

Sep. 1 Sold a building that cost \)520,000 (accumulated depreciation of \(285,000 through December 31 of the preceding year). Whitney Plumb received \)390,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of \(25,000.

Dec. 31 Recorded depreciation as follows:

Communication equipment is depreciated by the straight-line method over a five-year life with zero residual value. Office equipment is depreciated using the double-declining-balance method over five years with a \)2,000 residual value.

Record the transactions in the journal of Whitney Plumb Associates.

Question: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?

What is a lump-sum purchase, and how is it accounted for?
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