Chapter 2, Problem 26P

a.

To determine

Determine the amounts that Company M would report in its post-acquisition balance sheet.

Explanation of Solution

The amounts that Company M would report in its post-acquisition balance sheet are as follows:

Particulars		Company C	Company K
Cash		$        18,000 (1)	$       20,000
Receivables		$      270,000	$       90,000
Inventory		$      360,000	$     140,000
Land		$      200,000	$     180,000
Buildings (net)		$      420,000	$     220,000
Equipment (net)		$      160,000	$       50,000
Investment in Company T		$      515,000 (2)
Total assets		$   1,943,000	$     700,000
Accounts payable		$     (150,000)	$      (40,000)
Long-term liabilities		$     (630,000)	$    (200,000)
Common stock		$     (130,000)	$    (120,000)
Additional paid-in capital		$     (528,000) (3)	$                 -
Retained earnings, 1/1/15		$     (505,000) (4)	$    (340,000)
Total liabilities and equity		$  (1,943,000)	$    (700,000)

Table: (1)

Working note:

Calculation of cash:

$\begin{array}{c}\text{Cash}\text{=}\text{Book}\text{value}\text{of}\text{cash}\text{in}\text{books}\text{of}\text{M}-\text{Stock}\text{issuance}\text{cost}-\text{Acquisition}\text{cost}\\ =\$60,000-\$12,000-\$30,000\\ =\$18,000\end{array}$

(1)

Calculation of investment:

$\begin{array}{c}\text{Investment}\text{in}\text{Company}\text{T=}\text{Fair}\text{value}\text{of}\text{assets}\text{and}\text{liabilities}+\text{Undervalued}\text{assets}\\ =\$20,000+\$90,000+\$140,000+\$180,000+\$220,000\\ +\$50,000-\$40,000-\$200,000+\$55,000\\ =\$515,000\end{array}$

(2)

Calculation of Additional paid-in Capital:

$\begin{array}{c}\text{Additional paid-in Capital}\text{=}\text{Additional paid-in Capital}\text{of}\text{Company}\text{M}\\ \text{+}\text{New}\text{Additional paid-in Capital}-\text{Stock}\text{issuance}\text{cost}\\ \text{=}\$360,000+\left(20,000\times 9\right)-\$12,000\\ =\$528,000\end{array}$

(3)

Calculation of Retained earnings, 1/1/15:

$\begin{array}{c}\text{Retained earnings, 1/1/15 }\text{=}\text{\$420,000}\text{+}\text{Gain}\text{on}\text{bargain}\text{purchase}-\text{Amount}\text{paid}\text{to}\text{lawyers}\\ \text{=}\text{\$420,000}\text{+}\text{\$115,000}-\$30,000\\ =\$505,000\end{array}$

(4)

b.

To determine

Prepare a worksheet to consolidate the balance sheets of these two companies as of January 1, 2015.

Explanation of Solution

The worksheet to consolidate the balance sheets of these two companies as of January 1, 2015 is as follows:

Particulars		Company C	Company K	Consolidated Entries		Consolidated Balances
Cash		$18,000	$20,000			$38,000
Receivables		$270,000	$90,000			$360,000
Inventory		$360,000	$140,000	$5,000		$505,000
Land		$200,000	$180,000	$20,000		$400,000
Buildings (net)		$420,000	$220,000	$30,000		$670,000
Equipment (net)		$160,000	$50,000			$210,000
Investment in Company T		$515,000			$460,000
					$55,000	$0
Total assets		$1,943,000	$700,000			$2,183,000
Accounts payable		($150,000)	($40,000)			($190,000)
Long-term liabilities		($630,000)	($200,000)			($830,000)
Common stock		($130,000)	($120,000)	$120,000		($130,000)
Additional paid-in capital		($528,000)	$0			($528,000)
Retained earnings, 1/1/15		($505,000)	($340,000)	$340,000		($505,000)
Total liabilities and equity		($1,943,000)	($700,000)	$515,000	$515,000	($2,183,000)

Table: (2)