Bargain Purchase: Sontag Corporation's net assets have fair values as described below. Current assets $250,000
Land 600,000
Building 1,000,000
Loans payable 300,000
The Pratt Company pays $3,000,000 for Sontag Corporation, and records the acquisition as a merger. Pratt Company determines that identifiable intangibles valued at $1, 500,000, not previously reported on Sontag's books, also are recognized as acquired assets.
Required:
1. Prepare a schedule to calculate the gain on acquisition.
2. Prepare Pratt's journal entry to record the merger.
3. Now assume Pratt determines that Sontag Corporation has unreported contingent liabilities, reportable at the date of acquisition following GAAP, with a fair value of $75,000. Recalculate the gain on acquisition.

The Pratt Company

1. Schedule of Gain on Acquisition:

Current assets       $250,000

Land                          600,000

Building                  1,000,000

Loans payable        (300,000)

Intangible assets   1,500,000

Total fair value    $3,050,000

Investment cost   (3,000,000)

Gain on acquisition $50,000

2. Pratt's Journal Entry to record the merger:

Debit Assets:

 Current assets       $250,000

 Land                          600,000

 Building                  1,000,000

 Intangible assets   1,500,000

Credit Loans payable $300,000

Credit Cash $3,000,000

CreditGain on acquisition $50,000

To record the merger of Pratt Company and Sontag Corporation.

3. The gain on acquisition now changes to a loss of $25,000, which is treated as acquired Goodwill.

Explanation:

a) Data and Calculations:

Fair values of Sontag Corporation's Net Assets:

Current assets       $250,000

Land                          600,000

Building                  1,000,000

Intangible assets   1,500,000

Loans payable        (300,000)

Total fair value    $3,050,000

Investment cost   (3,000,000)

Gain on acquisition $50,000

Fair values of Sontag Corporation's Net Assets:

Current assets       $250,000

Land                          600,000

Building                  1,000,000

Intangible assets   1,500,000

Loans payable        (300,000)

Contingent liabilities (75,000)

Total fair value    $2,975,000

Investment cost   (3,000,000)

Loss on acquisition $25,000

= Goodwill on acquisition

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