Question

Question: (Accounting for Goodwill) Fred Moss, owner of Moss Interiors, is negotiating for the purchase of Zweifel Galleries. The following balance sheet of Zweifel is given in an abbreviated form as follows.

ZWEIFEL GALLERIES BALANCE SHEET AS OF DECEMBER 31, 2017
Assets		Liabilities and Stockholders’ Equity
Cash	\(100,000	Accounts payable	\) 50,000
Land	70,000	Notes payable (long-term)	300,000
Buildings (net)	200,000	Total liabilities	350,000
Equipment (net)	175,000	Common stock \(200,000
Copyrights (net)	30,000	Retained earnings 25,000	225,000
Total assets	\)575,000	Total liabilities and stockholders’ equity	\(575,000

Moss and Zweifel agree that:

1. Land is undervalued by \)30,000.
2. Equipment is overvalued by \(5,000.

Zweifel agrees to sell the gallery to Moss for \)350,000.

Instructions

Prepare the entry to record the purchase of Zweifel Galleries on Moss’s books.

Short answer

Answer

The amount of goodwill to be recorded is $100,000.

Step-by-step solution

Meaning of Journal Entry                                                                                                              

A journal entry is a record offinancial transactions kept in the books of accounts of an organization. There are debit and credit columns, as well as a narration of each transaction.

Preparing journal entry                                                                                                                   

Date	Particular	Debit ($)	Credit ($)
	Cash	100,000
	Land	100,000
	Building	200,000
	Equipment	170,000
	Copyright	30,000
	Goodwill	100,000
	Accounts Payable		50,000
	Long-term Notes Payable		300,000
	Cash		350,000

Working notes:

Calculation of goodwill amount

Net assets of Zweifel as reported ($575,000 – $350,000)	$225,000
Adjustments to fair value
Increase in land value 30,000
Decrease in equipment value (5,000)	25,000
Net assets of Zweifel at fair value	250,000
Selling price	350,000
Amount of goodwill to be recorded	$100,000