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Concept explainers
a.
To prepare:Journal entries that Company B would record for business combination
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.
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Explanation of Solution
In the books of Company B:
Record of merger expenses:
Date | Account | Debit ($) | Credit($) |
Merger Expense | 135,000 | ||
Cash | 135,000 | ||
(To record direct cost of combination.) |
Table (1)
- Merger Expense is an expense and it is increased by $135,000. Therefore, Merger Expenseaccount is debited with $135,000.
- Cash is an asset and it is decreased by $135,000. Therefore, cashaccount is credited with $135,000.
Record of stock registration and issuing common stock:
Date | Account | Debit ($) | Credit($) |
Deferred stock issue costs | 42,000 | ||
Cash | 42,000 | ||
(To recordcost of stock registration and issuing common stock.) |
Table (2)
- Deferred stock issue cost is equity and it is decreased by $42,000. Therefore, deferred stock account is debited with $42,000.
- Cash is an asset and it is decreased by $42,000. Therefore, cashaccount is credited with $42,000.
Record transfer of assets and liabilities:
Date | Account | Debit ($) | Credit($) |
Cash | 28,000 | ||
251,500 | |||
Inventory | 395,000 | ||
Long term investments | 175,000 | ||
Land | 100,000 | ||
Rolling Stock | 63,000 | ||
Plant and Equipment | 2,500,000 | ||
Patents | 500,000 | ||
Special Licenses | 100,000 | ||
Discount on equipment trust notes | 5,000 | ||
Discount on debentures | 50,000 | ||
109,7001 | |||
Current Payable | 137,200 | ||
Mortgage payable | 500,000 | ||
Premium on Mortgage payable | 20,000 | ||
Equipment Trust Notes | 100,000 | ||
Debentures Payable | 1,000,000 | ||
Common Stock | 180,000 | ||
Additional Paid-in Capital-Common | 2,298,000 | ||
Deferred stock issue cost | 42,000 | ||
(To recordbusiness combination) |
Table (3)
- Cash is an asset and it is increased by $28,000. Therefore, cashaccount is debited with $28,000.
- Accounts Receivable is an asset and it is increased by $251,500. Therefore, Accounts Receivableaccount is debited with $251,500.
- Inventory is an asset and it is increased by $395,000. Therefore, Accounts Inventory accountis debited with $395,000.
- Long term investmentis an asset and it is increased by $175,000. Therefore, Long term investment accountis debited with $175,000.
- Land is an asset and it is increased by $100,000. Therefore, Land accountis debited with $100,000.
- Rolling Stockis an asset and it is increased by $63,000. Therefore, Rolling stockaccountis debited with $63,000.
- Plant and equipment is an asset and it is increased by $2,500,000. Therefore, Plant and equipment accountis debited with $2,500,000.
- Patent is an asset and it is increased by $500,000. Therefore, Patent accountis debited with $500,000.
- Special Licensesis an asset and it is increased by $100,000. Therefore, Special Licensesaccountis debited with $100,000.
- Discount on equipment trust notes is a liability and decreased by $5,000. Therefore, Discount on equipment trust account notes is debited with $5,000.
- Discount on debenture is a liability and decreased by $50,000. Therefore, Discount on debenture account is debited with $50,000.
- Goodwill is an asset and it is increased by $109,700. Therefore, Goodwill accountis debited with $109,700.
- Current Payable is a liability and it is increased by $137,200. Therefore, Current Payableaccount is credited with $137,200.
- Mortgage Payable is a liability and it is increased by $500,000. Therefore, Mortgage Payableaccount is credited with $500,000.
- Premium on Mortgage Payable is a liability and it is increased by $20,000. Therefore, Premium on Mortgage Payableaccount is credited with $20,000.
- Equipment Trust Notes is a liability and decreased by $100,000. Therefore, Equipment Trust Notes account is debited with $100,000.
- Debentures Payable is a liability and decreased by $1,000,000. Therefore, Debentures Payable account is debited with $1,000,000.
- Common Stock is equity and it is increased by $180,000. Therefore, Common Stockaccount is credited with $180,000.
- Additional paid in capital-Commonis equity and it is increased by $2,298,000. Therefore, Additional paid in capital account is credited with $2,298,000.
- Deferred stock issue cost is equity and it is increased by $42,000. Therefore, deferred stock issue cost account is credited with $42,000.
Working Note:
- Calculation of goodwill:
Particulars | Amount ($) | Amount ($) |
Value of stock issued | 2,520,000 | |
Fair value of assets acquired | 4,112,500 | |
Fair value of liabilities assumed | (1,702,200) | |
Fair value of net identifiable assets | (2,410,300) | |
Goodwill | 109,700 |
b.
To prepare:Journal entries that Company H would record for business combination and distribution of stock.
Introduction:Internal expansion refers to situation in a company forms a subsidiary by transferring some of its assets and liabilities and in exchange of ownership shares. Shares of the subsidiary is either provided to the shareholders in addition to their existing shares (Spin off) or in exchange of their existing shares (split off).
b.
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Explanation of Solution
Record transfer of assets and liabilities:
Date | Account | Debit ($) | Credit($) |
Investment in Company B | 2,520,000 | ||
Allowance for | 6,500 | ||
614,000 | |||
Current payables | 137,200 | ||
Mortgage payable | 500,000 | ||
Equipment Trust Notes | 100,000 | ||
Debentures payable | 1,000,000 | ||
Discount on Debentures payable | 40,000 | ||
Cash | 28,000 | ||
Accounts Receivable | 258,000 | ||
Inventory | 381,000 | ||
Long term investments | 150,000 | ||
Land | 55,000 | ||
Rolling Stock | 130,000 | ||
Plant and Equipment | 2,425,00 | ||
Patents | 125,000 | ||
Special Licenses | 95,800 | ||
Gain on sale of assets and liabilities | 1,189,90 | ||
(To record business combination) |
Table (4)
- Investment in Company B is an asset and it is increased by $2,520,000. Therefore, Investment in Company Baccountis debited with $2,520,000.
- Allowance for Bad Debts is liability and it is decreased by $6,500. Therefore, Allowance for Bad Debtsaccountis debited with $6,500.
- Accumulate Depreciationis liability and it is decreased by $614,000. Therefore, Accumulate Depreciation accountis debited with $614,000.
- Current Payable is liability and it is decreased by $137,200. Therefore, Current Payableaccountis debited with $137,200.
- Mortgage Payable is liability and it is decreased by $500,000. Therefore, Mortgage Payable accountis debited with $500,000.
- Equipment Trust Notes is liability and it is decreased by $100,000. Therefore, Equipment Trust Notesaccountis debited with $100,000.
- Debentures Payable is liability and it is decreased by $1,000,000. Therefore, Debentures Payable accountis debited with $1,000,000.
- Discount on Debentures Payable is liability and it is increased by $1,000,000. Therefore, Discount on Debentures Payable accountis credited with $1,000,000.
- Cash is an asset and it is decreased by $28,000. Therefore, Cash account is credited with $28,000.
- Accounts Receivable is an asset and it is decreased by $258,000. Therefore, Accounts Receivableaccount is credited with $258,000.
- Inventory is an asset and it is decreased by $381,000. Therefore, Inventoryaccount is credited with $381,000.
- Long term investment is an asset and it is decreased by $150,000. Therefore, Long term investmentaccountis credited with $150,000.
- Land is an asset and it is decreased by $55,000. Therefore, landaccountis credited with $55,000.
- Rolling Stock is an asset and it is decreased by $130,000. Therefore, Rolling Stockaccountis credited with $130,000.
- Plant and Equipment is an asset and it is decreased by $2,425,000. Therefore, Plant and Equipmentaccountis credited with $2,425,000.
- Patent is an asset and it is decreased by $125,000. Therefore, Patentsaccountis credited with $125,000.
- Special License is an asset and it is decreased by $95,800. Therefore, Special Licensesaccountis credited with $95,800.
- Gain on sale of assets and liabilities is an asset and it is decreased by $1,189,900. Therefore, Gain on sale of assets and liabilitiesaccountis credited with $1,189,900.
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