Question

Company Y is purchased by Company X, and the purchase price is $2,500,000 greater than the fair values of the identifiable net assets acquired. One of the assets acquired is a building, originally valued at $1,000,000 at the date of the purchase. Six months after the acquisition, it is discovered that the building was really only worth $200,000 at the date of acquisition. What entry is made to reflect this new information?

Answer 1

Upon discovering the building was overvalued in the purchase of Company Y by Company X, the balance sheet must be adjusted with a journal entry that devalues the building asset by $800,000 and recognizes a corresponding impairment loss.

Step-by-step explanation:

When Company Y is purchased by Company X and it is later found that a building's value was overstated at the time of purchase, an adjustment to the balance sheet must be made. Originally, if the purchase price was $2,500,000 greater than the fair values of the identifiable net assets (known as goodwill), and the building was valued at $1,000,000.

A decrease in the asset's value should be recognized due to the new information indicating the building was only worth $200,000.The journal entry to reflect the new valuation of the building would involve a debit (increase) to a loss account (e.g., impairment loss) and a credit (decrease) to the building asset account for $800,000, which is the

Difference between the original value recognized ($1,000,000) and the revised value ($200,000). Simultaneously, there would be a reduction in goodwill or a separate impairment loss if the revaluation of the building does not fully absorb the excess purchase price.