Setting up beginning balances

[ILLMAS]

Scenario

TP bought an established business for $10K, bill of sale states the following:

Widgets $25K estimated retail value of inventory

Furniture & Equipment $10K

Total sales price $10K

So the TP paid $10K for a business that is worth $35K, how does one account for the $25K?

Thanks

[jklcpa]

48 minutes ago, ILLMAS said:

how does one account for the $25K

Purchaser doesn't. His concern is only that he paid $10K and how to allocate that for the assets acquired.

Does the bill of sale break down the sales price between the inventory and F&F?  Was a form 8594 prepared?  That allocation is what you need to know.  Seller also needs to know that allocation for reporting his side of the transaction too.

[Elrod]

Here is my calculation, for what its worth...

Debit....Inventory..$7,100.00

Debit....Furniture & Equipment..$2,900.00

                                  Credit....Capital......................................$10,000.00

25k is 71% of 35k             10k is 29% of 35k     Thus my above calculation.    Hope this might help, Illmas

[ILLMAS]

18 minutes ago, jklcpa said:

Purchaser doesn't. His concern is only that he paid $10K and how to allocate that for the assets acquired.

Does the bill of sale break down the sales price between the inventory and F&F?  Was a form 8594 prepared?  That allocation is what you need to know.  Seller also needs to know that allocation for reporting his side of the transaction too.

How I listed in the scenario is exactly as it appears on the bill of sale, the widgets just has that note.  I am representing the buyer and the prior preparer did not prepare the form, I am redoing the books for the prior tax year since the client records needs major cleanup.  

[Slippery Pencil]

The business probably wasn't worth $35K to the buyer.  Buyers of business don't usually pay retail for the existing inventory.