Exercise 2-1 Preston Company acquired the assets (except for cash) and assumed the liabilities of Saville...

Calculation of Purchase consideration

Here purchase consideration is calculated as per net payments method

Purchase consideration     = $1,547,580

Net assets at fair value       = $1,932,590 - $ 538,200

                                                  = $1,394,390

Goodwill to be recorded** = 1,547,580 – 1,394,390

                                                   = 1,53,190 (Note 1)

(As Net assets taken over is less than the purchase consideration account goodwill to be recorded here, else capital reserve to be recorded)

Entries in the books of Preston Company (Amount in $)

1) Business purchase A/c                               1,547,580

           To Liquidators of Saville company              1,547,580

(Being purchase consideration due entry passed)

2) Land A/c                                                      671,300

     Plant and equipment A/c 577,650

Inventory A/c 363,860

     Receivables A/c 209,800

     Cash A/c                                                      109,980

     Good will A/c ** (from Note 1) 153,190

To Current liabilities                                 538,200

                 To Business Purchase A/C                     1,547,580

(Being assets and liabilities are taken at fair value and difference between purchase consideration and net assets is considered as Goodwill as Purchase consideration is more than fair value of net assets)

3) Liquidators of Saville company A/c 1,547,580

         To Cash A/c                                                     1,547,580

(Being Purchase consideration discharged)