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.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
|
Hamilton Company
|
|
Balance Sheet
|
|
January 1, 2019
|
|
1
|
Cash
|
$30,000.00
|
Accounts payable
|
$20,000.00
|
|
2
|
|
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
|
|
60,000.00
|
|
6
|
|
$450,000.00
|
|
$450,000.00
|
| 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 |
| 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. |
| 1. | Compute the amount of |
| 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 |
| 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. |
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 9 images
