Problem: On June 30, 2009, Sampras Company reported the following account balances:
Receivables $80,000 Current liabilities $(10,000)
Inventory 70,000 Long-term liabilities (50,000)
Buildings (net) 75,000 Common stock (90,000)'
Equipment (net) 25,000 Retained earnings (100,000)
Total assets $250,000 Total liabilities and equities $(250,000)
On June 30, 2009, Pelham paid $300,000 cash for all assets and liabilities of Sampras, which will cease to exist as a separate entity. In connection with the acquisition, Pelham paid $10,000 in direct combination costs and agreed to pay $50,000 to the former owners of Sampras contingent on meeting certain revenue goals during 2010. Pelham estimated the present value of its probability adjusted expected payment for the contingency at $15,000.
In determining its offer, Pelham noted the following pertaining to Sampras:
- It holds a building with a fair value $40,000 more than its book value.
- It has developed a customer list appraised at $22,000, although it is not recorded in its financial
records.
- It has research and development activity in process with an appraised fair value of $30,000.
However, the project has not yet reached technological feasibility and the assets used in the
activity have no alternative future use.
- Book values for the receivables, inventory, equipment, and liabilities approximate fair values.
Prepare Pelham's accounting entry to record the combination with Sampras using the
a. Acquisition method.
b. Purchase method.