Edina Company Acquired the Assets (Except Cash) and Assumed the Liabilities

question 20

Essay

Edina Company acquired the assets (except cash) and assumed the liabilities of Burns Company on January 1, 2016, paying $2,600,000 cash. Immediately prior to the acquisition, Burns Company's balance sheet was as follows: Edina Company agreed to pay Burns Company's former stockholders $200,000 cash in 2017 if post- combination earnings of the combined company reached $1,000,000 during 2016.
Required:
A. Prepare the journal entry necessary for Edina Company to record the acquisition on January 1, 2016. It is expected that the earnings target is likely to be met.
B. Prepare the journal entry necessary for Edina Company in 2017 assuming the earnings contingency was not met.

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Definitions:

Goodwill

The intangible asset that arises as a result of the acquisition of one company by another for a premium value, representing factors like reputation, brand, and customer relations.

Survival

The ability of an entity, whether an individual, business, or species, to continue existence and maintain its functions in its environment.

Business

An organization or enterprising entity engaged in commercial, industrial, or professional activities, aiming to generate profits.

Positive Meanings

Words, phrases, or symbols that convey optimistic, affirmative, or beneficial connotations.