Bower company purchased lark corporation’s net assets on january 3, 20x2, for $632,000 cash. in addition, bower incurred $9,000 of direct costs in consummating the combination. at the time of acquisition, lark reported the following historical cost and current market data:

balance sheet item book value fair value
assets
cash & receivables $ 57,000 $ 57,000
inventory 114,000 165,000
buildings & equipment (net) 207,000 307,000
patent — 203,000

total assets $ 378,000 $ 732,000

liabilities & equities
accounts payable $ 20,000 $ 20,000
common stock 98,000
additional paid-in capital 66,000
retained earnings 194,000

total liabilities & equities $ 378,000

required:

prepare the journal entry or entries with which bower recorded its acquisition of lark’s net assets. (if no entry is required for a transaction/event, select "no journal entry required" in the first account field.)

record the payment of merger costs.
record the acquisition of lark corporation net asets.

Preparation of Journal Entries

Date                      Particulars                                  Dr($)                Cr($)

January 3, 20x2      Cash & Receivables              57,000

                                 Inventory                                165,000

                                Buildings & Equipment           307,000

                                Patent                                       203,000

                                Account Payable                                               20,000                                                

                                Purchase Consideration                                    632,000                                                                  

                               Gain on Purchase Bargain                                  80,000                                

                              (Being purchase of Lark

                               Corporation`s net assets)                                                                      

Recording of merger costs.

(Debit)  Cash                                                             $9,000

(Credit)  Merger Expenses                                       $9,000

Recording of acquisition of Lark Corporation`s net assets

(Debit)  Investment in Lark`s net asset                    $712,000

(Credit)   Cash                                                            $632,000

(Credit)  Gain on Purchase Bargain                          $80,000

Explanation:

When acquiring another business, net asset (Total Assets - Total Liabilities) is valued at fair value (sometimes called market value, not book value.  Hence, the reason why the fair value of Lark`s assets and liabilities was used in the calculation above. So the net assets  ($57,000+$165,000+$307,000+$203,000 - $20,000) = $712,000.

After, calculating the net assets of the Lark, the purchase consideration given by Bower Company has to be removed from the net asset, in order to get the goodwill or gain on purchase bargain on the acquisition. The formula is Purchase consideration - Net assets of the target company = Goodwill (Gain on purchase bargain). If the purchase consideration is higher than the net assets, then goodwill is obtained. If the purchase consideration is lower than net assets acquired then, gain on purchase bargain is obtained.

In Bower`s case, gain on purchase bargain is obtained because net assets is  greater than purchase consideration ($632,000 - $712,000).

Merger cost

Merger cost is not considered as part of purchase consideration. The merger cost is taken to income statement of Bower Corporation as expense.

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