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Homework answers / question archive / On Dec 31, 2019, Ahmed Ali issued $200,000 in debt and 20,000 new shares of its $10 par value stock to Rasha Incorporation owners in exchange for all of the outstanding shares of that company
On Dec 31, 2019, Ahmed Ali issued $200,000 in debt and 20,000 new shares of its $10 par value stock to Rasha Incorporation owners in exchange for all of the outstanding shares of that company. Ahmed Ali shares had a fair value of $30 per share. Prior to the combination, the financial statements for Ahmed Ali & Rasha for ending Dec 31, 2019 were as follows:
|
Rasha |
Ahmed Ali |
|
|
Revenue |
900,000 |
300,000 |
|
Expenses |
-660,000 |
-200,000 |
|
Net income |
240,000 |
100,000 |
|
Retained earnings (opening) |
300,000 |
140,000 |
|
Net income |
240,000 |
100,000 |
|
Dividends paid |
-90,000 |
0 |
|
Retained earnings (closing) |
450,000 |
240,000 |
|
Cash |
20,000 |
40,000 |
|
Receivables |
400,000 |
200,000 |
|
Patented technology |
900,000 |
450,000 |
|
Equipment |
750,000 |
600,000 |
|
Total assets |
2,070,000 |
1,290,000 |
|
Liabilities |
1,000,000 |
500,000 |
|
Common stock |
350,000 |
250,000 |
|
Additional paid in capital |
270,000 |
300,000 |
|
Retained earnings |
450,000 |
240,000 |
|
Total liabilities & equity |
2,070,000 |
1,290,000 |
Ahmed Ali also paid $10,000 to a broker for arranging the transaction. In addition, Ahmed Ali paid $25,000 in stock issuance costs. Rasha Incorporation equipment was worth $820,000 and its patented technology was valued at only $920,000.
Complete the following tasks:
a. Pass journal entry of the investment in the books of Ahmed Ali?
b. Pass journal entry of the brokerage and stock issue cost in the books of Ahmed Ali
c. Calculate the Goodwill or Barging Gain?
Answer :
1) Journal Entry of investment in the books of Ahmed Ali
| Dr. ($) | Cr ($) | ||
| 1 | Investment in Rash Incorporation | 400000 | |
| To Share Capital (20000 Sahres x $10) | 200000 | ||
| To Debt | 200000 | ||
| (Being investment made in Rash Inc by issuing 20000 shares of $10 each and debt securities) |
2)Journal entry of the brokerage and stock issue cost in the books of Ahmed Ali
| Dr. ($) | Cr. ($) | ||
| Brokerage Fees | 10000 | ||
| Stock Issue cost | 25000 | ||
| To Bank Account | 35000 | ||
| (Being stock issue cost and brokerage fees paid by Ahmad Ali Inc |
3) Calculation of Goodwill or Bargain Purchase
| Particular | $ | ||
| Consideration Paid | |||
| Debt | 200000 | ||
| Share Capital | 200000 | ||
| Total Consideration | 400000 | ||
| Less: Fair value of assets and liabilities assumed at acquisition (Equity | |||
| Share Capital | 350000 | ||
| Revaluation of Equipment | 70000 | ||
| Revaluation of Patented Technology | 20000 | ||
| (440000) | |||
| Gain on Bargin Purchase | 40000 |
The bargain gain is calculated as the difference between the total invesment by Ali and the total equity from Rash. The consideration of the investment seems to be less than the equity, hence it is a gain. If the investment was higher than the total equity, it could have been goodwill.
