Question

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.

Answer 1

investment on Kingbird Enterprises 650,000 debit

Goodwill 40,000 debit

cash 690,000 credit

Step-by-step 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