Question

Asset acquisition vs. stock purchase (fair value equals book value) Assume that an investor purchases the business of an investee. The fair value of the investee company is equal to its reported book value and the fair values of the individual net assets are equal to their reported book values. The investee company reports the following balance sheet on the acquisition date:

Cash $1,680 Accounts payable $3,360
Accounts receivable 3,360 Accrued liabilities 5,040
Inventories 6,720 -
Current assets 11,760 Current liabilities 8,400
Long-term liabilities 6,720
PPE, net 16,800 Stockholdersâ equity 13,440
Total assets $28,560 Total liabilities and equity $28,560

Required:
a. Provide the journal entry if the investor pays cash and purchases the assets and assumes the liabilities of the investee company.
b. Provide the journal entry if the investor pays cash and purchases all of the stock of the investeeâs shareholders.

Answer 1

Part a

Debit : Cash $1,680

Debit : Accounts receivable $3,360

Debit : Inventories $6,720

Debit : PPE, net $16,800

Credit : Accounts payable $3,360

Credit : Accrued liabilities $5,040

Credit : Long-term liabilities $6,720

Credit : Cash $13,440

Part b

Debit : Investment in Subsidiary $13,440

Credit : Cash $13,440

Step-by-step explanation:

Part a

A transaction or event where investor only purchases the assets and assumes the liabilities of the investee is called an Asset Acquisition. No Group Statements are prepared.

Part b

A transaction or event in which an Investor obtains CONTROL of one or more businesses is called a Business Combination. Investee becomes a subsidiary and continues to exist. Investor must prepare Group Statements.