On May 31,2020, Genesis Company has assets and liabilities with the following fair values: Current Assets-P180,000; Non-Current Assets-P220,000; Liabilities -P40,000.
On June 1, 2020, Judges Corporation purchased the net assets of Genesis for P310,000 cash. In the books of Judges, the acquisition resulted to:
a Gain recognized in the P/L amounting to P50,000
b. Goodwill recognized in the balance sheet amounting to 50,000
c. Gain recognized in the OCI amounting to P50,000
d. Decrease in current assets of P50,000
The correct answer and explanation is :
The correct answer is b. Goodwill recognized in the balance sheet amounting to P50,000.
Explanation:
In this scenario, Judges Corporation acquired the net assets of Genesis Company for P310,000 in cash. To understand how this transaction impacts Judges’ financial statements, we need to calculate the fair value of Genesis’s net assets and compare it to the purchase price of P310,000.
- Fair value of Genesis’s net assets:
- Current Assets: P180,000
- Non-Current Assets: P220,000
- Total Assets: P180,000 + P220,000 = P400,000
- Liabilities: P40,000
- Net Assets = Total Assets – Liabilities = P400,000 – P40,000 = P360,000
- Purchase price paid by Judges: P310,000
- Comparison:
- The net assets of Genesis have a fair value of P360,000, while Judges paid P310,000 to acquire them.
- This means Judges paid less than the fair value of Genesis’s net assets (P310,000 < P360,000).
- Impact on Judges’ Financial Statements:
- The difference between the fair value of the net assets and the purchase price represents goodwill. In this case, the difference is P360,000 – P310,000 = P50,000.
- Goodwill is recognized on the balance sheet when the purchase price exceeds the fair value of the acquired net assets, reflecting the value of intangible assets like reputation, customer loyalty, or market position.
Therefore, the correct accounting treatment would be the recognition of goodwill of P50,000 in Judges’ balance sheet.
Why Other Options Are Incorrect:
- a. Gain recognized in the P/L amounting to P50,000: A gain would only be recognized if the purchase price were greater than the fair value of the assets acquired. Here, the purchase price is less than the fair value, so no gain is recognized in the profit and loss.
- c. Gain recognized in the OCI amounting to P50,000: This is incorrect because the gain or goodwill is recognized in the balance sheet, not the other comprehensive income (OCI).
- d. Decrease in current assets of P50,000: There’s no decrease in current assets. The purchase price is less than the fair value of the net assets, so the result is goodwill, not a decrease in assets.
Thus, the answer is b. Goodwill recognized in the balance sheet amounting to P50,000.