Question

On January 1, 2020, the balance sheet of Naperville Company (a sole proprietorship) was as follows.

Assets Liabilities
Accounts receivable (net of allowance) $120,000 Current $76,000
Inventory 180,000 Noncurrent 160,000 $236,000
Plant and equipment (net of depreciation) 400,000 Equity
Land 60,000 Owners’ equity 524,000
Total $760,000 Total liabilities and owners’ equity $760,000
On January 1, 2020, Chicago Corporation purchased all of the assets and assumed all of the liabilities listed on the above balance sheet for $580,000 cash. The assets, on date of purchase, were valued by Chicago Corporation as follows: accounts receivable (net), $100,000; inventory, $170,000; plant and equipment (net), $400,000; and land, $90,000. In addition, Chicago Corporation estimated purchased intangible assets of $4,000 for customer list and $16,000 for trade names (both previously unrecorded). The liabilities were valued at their carrying amounts.

Required

a. Compute the amount of goodwill included in the purchase price paid by Chicago Corporation.

b. Provide the entry that Chicago Corporation should make to record the purchase of Naperville Company.

Account Name Dr. Cr.
Accounts Receivable (net)
Inventory
Plant and Equipment (net)
Land
Intangible Asset—Customer List
Intangible Asset—Trade names
Goodwill
Current Liabilities
Noncurrent Liabilities
Cash
c. What is the minimum amount of goodwill that Chicago Corporation can amortize at the end of 2020?

Answer 1

Step-by-step explanation:

From the information povided:

(a) To compute the amount of goodwill paid by Chicago Corporation

Particulars Amount ($)

Accounts Receivable 100000

Inventory 170000

Plant & Equipment 400000

Land 90000

Customer List 4000

Trade Names 16000

NET ASSETS (A) 780000

Current liabilities 76000

Non-current liabilities 160000

NET LIABILITIES (B) 236000

∴

PURCHASE CONSIDERATION (A -B) 544000

Less: Cash Paid 580000

GODWILL 36000

b)

In the books of Chicago Corporation, the Journal Entry to record the purchase of Naperville Company.

Account Name Dr. Cr.

Accounts Receivable A/C 100000

Inventory A/C 170000

Plant Equipment A/C 400000

Land A/C 90000

Customer List A/C 4000

Trade Names A/C 16000

Goodwill A/C 36000

Current liabilities A/C 76000

Non-Current Liabilities A/C 160000

Cash A/C 580000

c)

The minimum required amount of goodwill that Chicago can amortize by the end of 2020 is $3600.This is because the amortization can take place for a period of 10 years.