Chapter 1, Problem 1.40P

a.

To determine

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).

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
	Accounts Receivable	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
	Goodwill	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:

1. Calculation of goodwill:

Particulars	Amount ($)	Amount ($)
Value of stock issued   $\left(\$14\times 180,000\right)$		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 determine

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).

Explanation of Solution

Record transfer of assets and liabilities:

Date	Account	Debit ($)	Credit($)
	Investment in Company B	2,520,000
	Allowance for Bad Debts	6,500
	Accumulated depreciation	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.