On June 30, 2011, Sampras Company reported the following account balances:
|
Receivables |
$80,000 |
|
Inventory |
70,000 |
|
Buildings (net) |
75,000 |
|
Equipment (net) |
25,000 |
|
Total assets |
$250,000 |
|
Current liabilities |
($10,000) |
|
Long term liabilities |
50,000 |
|
Common stock |
90,000 |
|
Retained earnings |
100,000 |
|
Total liabilities and equities |
($250,000) |
On June 30, 2011, Pelham paid $300,000 cash for all assets and liabilities of Sampras, which will cease to exist as a separate entity. In connection with the acquisition, Pelham paid $10,000 in legal fees. Pelham also agreed to pay $50,000 to the former owners of Sampras contingent on meeting certain revenue goals during 2012. Pelham estimated the present value of its probability adjusted expected payment for the contingency at $15,000. In determining its offer, Pelham noted the following pertaining to Sampras:
• It holds a building with a fair value $40,000 more than its book value.
• It has developed a customer list appraised at $22,000, although it is not recorded in its financial records.
• It has research and development activity in process with an appraised fair value of $30,000.
However, the project has not yet reached technological feasibility and the assets used in the activity have no alternative future use.
• Book values for the receivables, inventory, equipment, and liabilities approximate fair values. Prepare Pelham’s accounting entry to record the combination with Sampras using the
a. Acquisition method.
b. Purchase method.