After extended negotiations, Rothman Corporation bought from Felzar Company most of the latter€™s assets on June 30, 2007. At the time of the sale, Felzar€™s accounts (adjusted to June 30, 2007) reflected the following descriptions and amounts for the assets transferred:

You ascertain that the contra (valuation) accounts were allowance for doubtful accounts, allowance to reduce inventory to market, and accumulated depreciation. During the extended negotiations, Felzar held out for a consideration of approximately $600,000 (depending on the level of the receivables and inventory). As of June 30, 2007, however, Felzar agreed to accept Rothman€™s offer of $450,000 cash plus 1% of the net sales (as defined in the contract) of the next five years, with payments at the end of each year. Felzar expects that Rothman€™s total net sales during this period will exceed $15 million.

Required
1. Explain how Rothman Corporation should record this transaction.
2. Discuss the propriety of recording goodwill in the accounts of Rothman Corporation for thistransaction.

Transcribed Image Text:

Contra (Valuation Bk Value Cost Account $ 3,000 5,200 Receivables 83,600 107,000 20,000 207,500 80,600 Inventory Land Buildings Fixtures and 101,800 20,000 134,500 73,000 equipment 205,000 50,000 $673,100 163,300 50,000 $122,900 $550,200 41,700 Goodwill