Capitol Company decided to sell one of its subsidiaries, Subsidiary ABC. BiRite Inc, is the purchaser of this subsidiary. The selling price for Subsidiary ABC is $2,000,000. BiRite performed a valuation analysis of Subsidiary's ABC assets acquired and liabilities. The following table presents book values from Subsidiary ABC financial statements and fair values determined by BiRite:

Description
Book Value
Fair Value
Inventory
420,000
$450,000
Accounts Receivable
330,000
330,000
Prepaid Assets
70,000
60,000
Equipment
290,000
410,000
Building Lease
330,000
360,000
Patent
-
220,000
Trademark
-
150,000
Current Liabilities
125,000
125,000
Lease Obligation
170,000
170,000
Other Long-term Liabilities
135,000
135,000

a. Prepare the journal entry made by BiRite to record the acquisition of Subsidiary ABC.
b. Describe how the journal entry would be different if the acquisition prices was $1 million.

What will be an ideal response?

Answer:
a.
Inventory
$450,000

Accounts Receivable
330,000

Prepaid Assets
60,000

Equipment
410,000

Building Lease
360,000

Patent
220,000

Trademark
150,000

Goodwill
450,000

Current Liabilities

125,000
Lease Obligation

170,000
Other Long-term Liabilities

135,000
Cash

2,000,000

b.
If the acquisition price was lower than the fair value of the net assets, the transaction would be considered to be a bargain purchase. In this case, instead of recognizing Goodwill of $450,000 (debit), BiRite would recognize a Gain from Bargain Purchase of $550,000 (credit). All other line items would be the same as above (except Cash).