Pham Company acquired the assets (except for cash) and assumed the liabilities of Senn Company on January 1, 2011, paying $720,000 cash. Senn Company”s December 31, 2010, balance sheet, reflecting both book values and fair values, showed:
Book Value
Fair Value
Accounts receivable (net)
$ 72,000
$65,000
Inventory
86,000
99,000
Land
110,000
162,000
Buildings (net)
369,000
450,000
Equipment (net)
237,000
288,000
Total
$874,000
$1,064,000
Accounts payable
$ 83,000
$83,000
Note payable
180,000
180,000
Common stock, $2 par value
153,000
Other contributed capital
229,000
Retained earnings
229,000
Total
$874,000
As part of the negotiations, Pham Company agreed to pay the former stockholders of Senn Company $135,000 cash if the post combination earnings of the combined company (Pham) reached certain levels during 2011 and 2012.
Required:
Record the journal entry on the books of Pham Company to record the acquisition on January 1, 2011. It is expected that the earnings target is likely to be met.
Assuming the earnings contingency is met, prepare the journal entry on Pham Company”s books to settle the contingency on January 2, 2013.
Assuming the earnings contingency is not met, prepare the necessary journal entry on Pham Company”s books on January 2, 2013.
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