Fred Moss, owner of Moss Interiors, is negotiating for the purchase of Oriole Ga
ID: 2572963 • Letter: F
Question
Fred Moss, owner of Moss Interiors, is negotiating for the purchase of Oriole Galleries. The balance sheet of Oriole is given in an abbreviated form below.
ORIOLE GALLERIES
BALANCE SHEET
AS OF DECEMBER 31, 2017
Assets
Liabilities and Stockholders’ Equity
$115,000
$49,800
71,000
307,500
201,000
357,300
176,000
$212,400
31,000
24,300
236,700
$594,000
$594,000
Moss and Oriole agree that:
Oriole agrees to sell the gallery to Moss for $380,100.
Prepare the entry to record the purchase of Oriole Galleries on Moss’s books. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Debit
Credit
Open Show Work
ORIOLE GALLERIES
BALANCE SHEET
AS OF DECEMBER 31, 2017
Assets
Liabilities and Stockholders’ Equity
Cash$115,000
Accounts payable$49,800
Land71,000
Notes payable (long-term)307,500
Buildings (net)201,000
Total liabilities357,300
Equipment (net)176,000
Common stock$212,400
Copyrights (net)31,000
Retained earnings24,300
236,700
Total assets$594,000
Total liabilities and stockholders’ equity$594,000
Explanation / Answer
When a company is purchased by another company then it's valuation is necessary to find out whether it s sold at profit or loss. For valuation purpose, we need to calculate net assets of the company.
Net assets of company is calculated by subtracting liabilities from total assets. While calculating net assets of the company we need to consider the changes in value of assets and liabilities, if any.
In given case, Land is undervalued by $31,100 and equipment is overvalued by $5,300 in books of Oriole. So, the correct value of Land and equipment will be after adding and subtracting the above values from the book value of land and equipment respectively. Therefore, firstly make an adjustment for above items to calculate correct value of assets as shown below:
Total assets = Cash + Land + Buildings + Equipment + Copyrights
Total assets = $115,000 + ($71,000+31,100) + $201,000 + ($176,000-$5,300) + $31,000
Total assets = $619,800
For the purpose of calculating liabilities, we consider short term and long term liabilities only.
Liabilities = Accounts payable + Notes payable
Liabilities = $49,800 + $307,500
Liabilities = $357,300
Now, calculate the net of assets of company by subtracting liabilities from total assets.
Net assets = Total assets – Liabilities
Net assets = $619,800 - $357,300
Net assets = $262,500
Therefore, net assets of Oriole galleries is $262,500 while Moss Company purchased it at cost of $$380,100. The difference between the net assets and purchase price is called goodwill because purchase price is higher than net assets value on that date.
Goodwill = $380,100 - $262,500
Goodwill = $117,600
The journal entry to record the purchase of Oriole Galleries on Moss’s books will be as follows:
*It is assumed that company has been purchased in cash.
Account Titles and Explanation Debit Credit Cash $115,000 Land $102,100 Building $201,000 Equipment $170,700 Copyrights $31,000 Goodwill $117,600 Accounts payable $49,800 Notes payable $307,500 Cash (purchase price)* $380,100Related Questions
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