Advanced Accounting Research

Exam Content

Arizona Corp. had the following account balances at 12/1/19: 

Receivables: $96,000; Inventory: $240,000; Land: $720,000; Building: $600,000; Liabilities: $480,000; Common stock: $120,000; Additional paid-in capital: $120,000; Retained earnings, 12/1/19: $840,000; Revenues: $360,000; and Expenses: $264,000.

 
Several of Arizona’s accounts have fair values that differ from book value. The fair values are:

Land — $480,000; Building — $720,000; Inventory — $336,000; and Liabilities — $396,000.

 
Inglewood Inc. acquired all of the outstanding common shares of Arizona by issuing 20,000 shares of common stock having a $6 par value, but a $66 fair value. Stock issuance costs amounted to $12,000.
 
 
Imagine you are the decision maker at Inglewood Inc.
 
Prepare a fair value allocation and goodwill schedule at the date of the acquisition. 
 
Determine in 525- words whether you would encourage acquiring Arizona Corp? Be sure to include your rationale.
 
Submit your assignment.
 
 
WORK DONE SO FAR
 

Particulars

Amount

Purchase Consideration (20,000 x 66)

$1,320,000

Less: Book value of net assets acquired

Receivables

$96,000

Inventory

$240,000

Land

$720,000

Building

$600,000

Liabilities

-$480,000

Difference between Revenues & Expenses (360000-264000)

$96,000

$1,272,000

Excess of purchase consideration over book value

$48,000

Less: Fair value adjustments

Land ($480,000-$720,000)

-$240,000

Building ($720,000-$600000)

$120,000

Inventory ($336,000-$240,000)

$96,000

Liabilities ($480,000-$396,000)

$84,000

$60,000

Bargain Purchase (Goodwill)

-$12,000

 
A bargain purchase involves assets acquired for less than fair market value. In a bargain purchase business combination, a corporate entity is acquired by another for an amount that is less than the fair market value of its net assets. Current accounting rules for business combinations require the acquirer to record the difference between the fair value of the acquired net assets and the purchase price as a gain on its income statement due to negative goodwill.