Woolco, Inc., purchased all the outstanding stock of Paint, Inc., for $980,000. Woolco also paid $10,000 in direct acquisition costs. Just before the investment, the two companies had the following balance sheets: Assets Woolco, Inc. Paint, Inc. Accounts receivable . . . . . . . . . . . . . . . $ 900,000 $ 500,000 Inventory . . . . . . . . . . . . . . . . . . . . . . . . 600,000 200,000 Depreciable fixed assets (net) . . . . . . . . 1,500,000 600,000 Total assets. . . . . . . . . . . . . . . . . . . . . $3,000,000 $1,300,000 Liabilities and Equity Current liabilities . . . . . . . . . . . . . . . . . . $ 950,000 $ 400,000 Bonds payable . . . . . . . . . . . . . . . . . . . 500,000 200,000 Common stock ($10 par). . . . . . . . . . . . 400,000 300,000 Paid-in capital in excess of par . . . . . . . 500,000 380,000 Retained earnings . . . . . . . . . . . . . . . . . 650,000 20,000 Total liabilities and equity . . . . . . . . . $3,000,000 $1,300,000 Appraisals for the assets of Paint, Inc., indicate that fair values differ from recorded book values for the inventory and for the depreciable fixed assets, which have fair values of $250,000 and $750,000, respectively. 1. Prepare the entries to record the purchase of the Paint, Inc., common stock and payment of acquisition costs. 2. Prepare the value analysis and the determination and distribution of excess schedule for the investment in Paint, Inc. 3. Prepare the elimination entries that would be made on a consolidated worksheet.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Woolco, Inc., purchased all the outstanding stock of Paint, Inc., for $980,000. Woolco also paid $10,000 in direct acquisition costs. Just before the investment, the two companies had the following
Assets Woolco, Inc. Paint, Inc.
Inventory . . . . . . . . . . . . . . . . . . . . . . . . 600,000 200,000
Total assets. . . . . . . . . . . . . . . . . . . . . $3,000,000 $1,300,000
Liabilities and Equity
Current liabilities . . . . . . . . . . . . . . . . . . $ 950,000 $ 400,000
Bonds payable . . . . . . . . . . . . . . . . . . . 500,000 200,000
Common stock ($10 par). . . . . . . . . . . . 400,000 300,000
Paid-in capital in excess of par . . . . . . . 500,000 380,000
Total liabilities and equity . . . . . . . . . $3,000,000 $1,300,000
Appraisals for the assets of Paint, Inc., indicate that fair values differ from recorded book values for the inventory and for the depreciable fixed assets, which have fair values of $250,000 and $750,000, respectively.
1. Prepare the entries to record the purchase of the Paint, Inc., common stock and payment of acquisition costs.
2. Prepare the value analysis and the determination and distribution of excess schedule for the investment in Paint, Inc.
3. Prepare the elimination entries that would be made on a consolidated worksheet.
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