Advanced Financial Accounting
11th Edition
ISBN: 9780078025877
Author: Theodore E. Christensen, David M Cottrell, Cassy JH Budd Advanced Financial Accounting
Publisher: McGraw-Hill Education
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Question
Chapter 1, Problem 1.35P
a.
To determine
To prepare:
Introduction: Internal expansion refers to situation in a company forms a subsidiary by transferring some of its assets and liabilities and in exchange of ownership shares. Shares of the subsidiary is either provided to the shareholders in addition to their existing shares (Spin off) or in exchange of their existing shares (split off).
a.
Expert Solution
Explanation of Solution
In the books of Company P:
Record transfer of assets and liabilities:
| Date | Account | Debit ($) | Credit($) |
| Cash | 30,000 | ||
| 60,000 | |||
| Inventory | 160,000 | ||
| Land | 30,000 | ||
| Building and Equipment | 350,000 | ||
| Bond Discount | 5,000 | ||
| 125,0001 | |||
| Accounts payable | 10,000 | ||
| Bonds payable | 150,000 | ||
| Common Stock | 80,000 | ||
| Additional Paid-in Capital | 520,000 | ||
| (To record transfer of assets and liabilities) |
Table (1)
- Cash is an asset and it is increased by $30,000. Therefore, cash account is debited with $30,000.
- Accounts Receivable is an asset and it is increased by $60,000. Therefore, Accounts Receivable account is debited with $60,000.
- Inventory is an asset and it is increased by $160,000. Therefore, Accounts Inventory is debited with $160,000.
- Land is an asset and it is increased by $30,000. Therefore, Land is debited with $30,000.
- Building and equipment is an asset and it is increased by $350,000. Therefore, Building and equipment is debited with $350,000.
- Bond discount is an asset and it is increased by $5,000. Therefore, Bond discount is debited with $5,000.
- Goodwill is an asset and it is increased by $125,000. Therefore, Goodwill is debited with $125,000.
- Accounts Payable is a liability and it is increased by $10,000. Therefore, Accounts Payable account is credited with $10,000.
- Bonds Payable is a liability and it is increased by $150,000. Therefore, Bonds Payable account is credited with $150,000.
- Common Stock is equity and it is increased by $80,000. Therefore, Common Stock account is credited with $80,000.
- Additional paid in capital is equity and it is increased by $520,000. Therefore, Additional paid in capital account is credited with $520,000.
- Deferred stock issue cost is equity and it is increased by $9,000. Therefore, Deferred stock issue cost account is credited with $9,000.
Working Note:
- Calculation of goodwill:
| Particulars | Amount |
| Fair value of consideration given | $600,000 |
| Fair value of net assets acquired | ($475,000) |
| Goodwill | $125,000 |
Table (2)
b.
To determine
To prepare:
Introduction: Internal expansion refers to situation in a company forms a subsidiary by transferring some of its assets and liabilities and in exchange of ownership shares. Shares of the subsidiary is either provided to the shareholders in addition to their existing shares (Spin off) or in exchange of their existing shares (split off).
b.
Expert Solution
Explanation of Solution
The balance sheet immediately following the acquisition:
| Company RCombined Balance SheetJanuary 1, 20X2 | |||||
| Assets | Amount($) | Liabilities | Amount($) | Amount($) | |
| Current Assets | Current Liabilities | ||||
| Cash | 100,000 | Accounts payable | 60,000 | ||
| Accounts receivables | 160,000 | Bonds payable | 450,000 | ||
| Inventory | 360,000 | Less: Discount | (5,000) | 445,000 | |
| Fixed Assets | |||||
| Land | 80,000 | Common Stock | |||
| Building and equipment | 950,000 | Common Stock | 280,000 | ||
| Less: | (250,000) | 700,000 | Additional Paid-in capital | 560,000 | |
| Goodwill | 125,000 | 180,000 | |||
| 1,525,000 | 1,525,000 | ||||
Table (3)
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Advanced Financial Accounting
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