ADVANCED ACCOUNTING
ADVANCED ACCOUNTING
12th Edition
ISBN: 9780357671221
Author: FISCHER
Publisher: CENGAGE L
Question
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Chapter 2, Problem 2A.1.2AP
To determine

Business combination:

Business combination refers to the combining of one or more business organizations in a single entity. The business combination leads to the formation of combined financial statements. After business combination, the entities having separate control merges into one having control over all the assets and liabilities. Merging and acquisition are types of business combinations.

Consolidated financial statements:

The consolidated financial statements refer to the combined financial statements of the entities which are prepared at the year-end. The consolidated financial statements are prepared when one organization is either acquired by the other entity or two organizations merged to form the new entity. The consolidated financial statements serve the purpose of both the entities about financial information.

Reverse acquisition:

The reverse acquisition refers to the acquisition of the public company by a private company in order to avoid the complexity involved in making public issue of securities. The capitalization of acquiring company is reorganized in the case of reverse acquisition.

To Prepare:

Consolidated worksheet as of December 31, 2015.

Expert Solution & Answer
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Explanation of Solution

    Company F and Company U
    Consolidation Worksheet
    Year ending December 31, 2015
    Balance SheetCompany FCompany UDebitCreditNCIConsolidated Balances
    Current assets$10,000 $5,000    $15,000
    Investment in Company U $360,000(1) $360,000 (EL)   
    Buildings$150,000 $100,000 $100,000 (D1)   $350,000
    Equipment$100,000 $20,000 $20,000 (D2)   $140,000
    Goodwill  $5,000 (D3)   $5,000
    Long-term liabilities($5,000)($10,000)   ($15,000)
    Common stock (Company U)($5,000) $5,000 (TR)   $0
    Paid-in capital in excess of par (Company U)($115,000) $115,000 (TR)   $0
    Retained earnings (Company U)($135,000)    ($135,000)
    Common stock (Company F) ($10,000)$6,000 (EL) $6,000 (TR) ($10,000)
    Paid-in capital in excess of par (Company F) ($450,000)$354,000 (EL) $254,000 (TR)  ($350,000)
    Retained earnings (Company F) ($15,000)$140,000 (TR) $125,000 (D)  $0
    Non-controlling interest     $0
    Totals$0 $0 $745,000 $745,000 $0 $0

            Table: (3)

Working note 1:

Compute the value of investment in Company U:

  Valueofinvestment=(6,000shares×$60)=$360,000

Being the equity of Company U eliminated to record the acquisition. The consideration has been transferred in the form of 6,000 shares of Company F having fair value of $60 each.

Working note 2:

Adjustments:

  • EL: Eliminate the investment account at the time of acquisition.
  • D: Distribute the excess amount which is applicable to the investment and the fair value adjustment for excess amount.
  • D1: Building adjusted to fair value by increasing $100,000.
  • D2: Equipment adjusted to fair value by increasing it at $20,000.
  • D3: Excess of fair value allotted to goodwill of $5,000.
  • TR: Retained earnings of Company F and paid-in-capital of Company U transferred to Paid-in-capital of Company F. The par value of $6,000 out of $260,000 transferred to common stock of Company F and remaining $254000 transferred to paid-in-capital in excess of par of Company F.

Working note 3:

Value Analysis schedule:

    Value analysis scheduleCompany-Implied fair valueParent price (100%)Non-controlling interest value (0%)
    Value of subsidiary (Consideration paid)$240,000 (2) $240,000Not applicable
    Fair value of net assets excluding goodwill$235,000 (1) $235,000  
    Goodwill$5,000 $5,000  

            Table: (4)

Determination and distribution of excess schedule:

    Determination and distribution of excess schedule 
    ParticularsCompany Implied fair valueParent price (100%)Non-controlling interest value (0%) 
    Fair value of subsidiary (a)$240,000 $240,000 Not applicable 
    Book value of interest acquired    
    Common stock$4,000    
    Paid-in capital in excess of par$96,000    
    Retained earnings$15,000    
    Total equity$115,000 $115,000   
    Interest acquired 100%  
    Book value (b)$115,000 $115,000   
    Excess of fair value over book value [c] = (a) - (b)$125,000 $125,000   
         
    Adjustment of identifiable accountsAdjustmentLifeAmortization per yearWorksheet key
    Increase in building$100,000   Debit (D) 1
    Increase in equipment$20,000   Debit (D) 2
    Goodwill$5,000   Debit (D) 3
    Total$125,000    

            Table: (5)

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