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19 September, 14:46

On September 1, 2020, Pina Corporation acquired Kingbird Enterprises for a cash payment of $690,000. At the time of purchase, Kingbird's balance sheet showed assets of $570,000, liabilities of $230,000, and owners' equity of $340,000. The fair value of Kingbird's assets is estimated to be $880,000.

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  1. 19 September, 15:01
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    investment on Kingbird Enterprises 650,000 debit

    Goodwill 40,000 debit

    cash 690,000 credit

    Explanation:

    We are going to recognize a goodwill between the value of the firm at fair value and the acquisition cost:

    acquisition cost: 690,000

    market value:

    assets 880,000 - liabilities of 230,000 = (650,000)

    goodwill: 40,000

    We enter the investment at the fair value of the net assets (assets - liabilities) as this is the value they got. Kingbird will recognize a gain in their books for the sale of theses assets above their book value. But; to us, the value of the assets is 880,000 not 570,000
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