Hamilton Company’s balance sheet on January 1, 2019, was as follows:

Hamilton Company

Balance Sheet

January 1, 2019

1	Cash	$30,000.00	Accounts payable	$20,000.00
2	Accounts receivable	80,000.00	Bonds payable	120,000.00
3	Marketable securities (short-term)	40,000.00	Pension liability	50,000.00
4	Inventory	100,000.00	Common stock	200,000.00
5	Property, plant, and equipment (net)	200,000.00	Retained earnings	60,000.00
6		$450,000.00		$450,000.00

Korbel Company is considering purchasing Hamilton (a privately held company) and discovers the following about Hamilton:

a.	No allowance for doubtful accounts has been established. A $10,000 allowance is considered appropriate.
b.	Marketable securities are valued at cost. The current market value is $60,000.
c.	The LIFO inventory method is used. The FIFO inventory of $140,000 would be used if the company is acquired.
d.	Land, included in property, plant, and equipment, which is recorded at its cost of $50,000, is worth $120,000. The remaining property, plant, and equipment is worth 10% more than its depreciated cost.
e.	The company has an unrecorded trademark that is worth $70,000.
f.	The company’s bonds are currently trading for $130,000.
g.	The pension liability is understated by $40,000.

Required:

1.	Compute the amount of goodwill if Korbel agrees to pay $500,000 cash for Hamilton.
2.	Next Level What are the reasons that the book value of Hamilton’s net identifiable assets differ from their market value?
3.	Prepare the journal entry to record the acquisition on the books of Korbel assuming Hamilton is liquidated.
4.	If Korbel agrees to pay only $400,000 cash, how much goodwill exists?
5.	If Korbel pays only $400,000 cash, prepare the journal entry to record the acquisition on its books, assuming Hamilton is liquidated.

Chart of Accounts

CHART OF ACCOUNTS

Hamilton Company

General Ledger

	ASSETS
111	Cash
112	Marketable Securities
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
160	Property, Plant, and Equipment
161	Land
182	Trademark
184	Goodwill

	LIABILITIES
211	Accounts Payable
221	Notes Payable
222	Pension Liability
224	Interest Payable
231	Salaries Payable
272	Bonds Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue
882	Gain on Purchase

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Income Tax Expense

Goodwill

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1. Compute the amount of goodwill if Korbel agrees to pay $500,000 cash for Hamilton.

Points:

0 / 1

Feedback

Check My Work

When a company is purchased by another company, previously developed but unrecognized goodwill can be separately identified and recognized by the acquirer. The purchased goodwill is the difference between the purchase price of the acquired company and the fair value of its identifiable net assets. Goodwill is recorded as an asset by the acquiring company because a transaction has occurred and the exchange price allows for a faithful representation of the value of the goodwill. Therefore, goodwill is a residual value determined only after an acquisition and only after the acquired company's other assets and liabilities are identified and measured. Goodwill is considered to have an indefinite life, and, therefore, it is not amortized.

4. If Korbel agrees to pay only $400,000 cash, how much goodwill exists?

none

$15,000

$85,000

$100,000

Points:

0 / 1

Next Level

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2. Which of the following are reasons that the book value of Hamilton's net identifiable assets differ from their market value?

I.	An unidentifiable intangible asset (goodwill) exists and is not reported on Hamilton's books.
II.	Hamilton's inventory is valued using LIFO, which is different from its value under FIFO.
III.	Hamilton has a valuable internally developed trademark that is not recorded.

Points:

0 / 1

General Journal

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3. Prepare the journal entry to record the acquisition of Hamilton by Korbel Company on January 1, 2019. Assume Korbel pays $500,000 cash and Hamilton is liquidated.

General Journal Instructions

All transactions on this page must be entered (except for post ref(s)) before you will receive Check My Work feedback.

PAGE 1

GENERAL JOURNAL

Score: 104/145

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1	Text entry invalid
2
3
4
5
6
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Points:

17.93 / 25

Feedback

Check My Work

When a company is purchased by another company, previously developed but unrecognized goodwill can be separately identified and recognized by the acquirer. The purchased goodwill is the difference between the purchase price of the acquired company and the fair value of its identifiable net assets.

5. Prepare the journal entry to record the acquisition of Hamilton by Korbel Company on January 1, 2019. Assume Korbel pays $400,000 cash and Hamilton is liquidated.

General Journal Instructions

All transactions on this page must be entered (except for post ref(s)) before you will receive Check My Work feedback.

PAGE 1

GENERAL JOURNAL

Score: 104/145

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9
10
11
12

Answer rating: 100% (QA)

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