Question

1. Salsa Company's equity accounts consist of capital stock of $1,500,000 and retained earnings of $500,000. Prance Company pays $8,000,000 for all the voting stock of Salsa Company. The fair value of Salsa's identifiable net assets is $3,500,000 higher than book value. If Salsa uses pushdown accounting, Salsa's entry to record the acquisition includes A. A $6,000,000 debit to goodwill. B. A $1,500,000 debit to capital stock. C. No changes in its equity accounts. D. A $500,000 debit to retained earnings.

Answer 1

The correct answer is A. A $6,000,000 debit to goodwill.

Step-by-step explanation:

Pushdown accounting is a bookkeeping method that can be used when one business is purchasing another. It involves valuing the assets and liabilities of the business being acquired at the purchase price rather than the historical cost.

As a first step, we calculate the difference between the purchases price and the historical cost which is:

$8,000,000 - ($1,500,000 + $500,000) = $6,000,000

Next, Salsa's entry to record the acquisition is simply to debit the Goodwill account and credit the Pushdown Capital account by this amount. The required entry is:

Debit: Goodwill $6,000,000

Credit: Pushdown Capital $6,000,000

This corresponds to option A among the given choices.

Answer 2

Answer:c). No changes in its equity account

Explanation: Goodwill is an intangible asset that is arises when a buyer acquires an existing business. Goodwill is arrived at by comparing the purchase price with the fair value of the net assets of the company being acquired.

Goodwill is not an asset that is derived from any activities related to income, it does not add to the retained earnings of the company.

In essence, goodwill does not directly affect stockholder equity because it cannot be disteibuted among stockholders.