Chapter 2, Problem 33P

a.

To determine

Prepare a post-combination balance sheet for Company N as of the acquisition date.

Explanation of Solution

The post-combination balance sheet for Company N as of the acquisition date is as follows:

Assets		Liabilities and owner's equity
Cash	$      64,000	Accounts payable	$    144,000
Receivables	$    213,000	Notes payable	$    415,000
Trademarks	$    625,000	Common stock	$    460,000
Record music catalog	$ 1,020,000	Additional paid-in capital	$    695,000
Research and development asset	$    200,000	Retained earnings	$    860,000
Equipment (net)	$    425,000
Goodwill	$      27,000
Totals	$ 2,574,000	Totals	$ 2,574,000

Table: (1)

Working note:

Journal entries to record acquisition of assets and liabilities:

General Journal
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
i)	Receivables		$                 63,000
	Trademarks		$                225,000
	Record music catalog		$               180,000
	In-process research and development		$               200,000
	Cash		$               29,000
	Equipment		$               105,000
	Goodwill		$               27,000
	Accounts payable			$          34,000
	Notes payable			$          45,000
	Common stock			$        60,000
	Additional paid-in capital $\left(\$750,000-\left(15,000\times \$4\right)\right)$			$       690,0000
	(to record the assets and liabilities acquired)
ii)	Stock issuance cost		$               25,000
	Cash			$        25,000
	(being Stock issuance cost paid)

Table: (2)

Computation of the fair value of the consideration transferred:

$\begin{array}{c}\text{Fair}\text{value}\text{of}\text{consideration}\text{=}\left(\text{15,000}\text{×}\text{\$50}\right)\\ =\$750,000\end{array}$

Thus, the fair value of the consideration transferred in this combination is $750,000.

b.

To determine

Prepare a worksheet to consolidate the two companies as of the combination date.

Explanation of Solution

The worksheet to consolidate the two companies as of the combination date is as follows:

Particulars		Company N	Company O	Consolidated Entries		Consolidated Balances
Cash		$             35,000	$        29,000			$            64,000
Receivables		$           150,000	$        65,000		$          2,000	$          213,000
Investment of Company O		$           750,000	$                 -		$      270,000
					$      480,000	$                     -
Trademarks		$           400,000	$        95,000	$      130,000		$          625,000
Record music catalog		$           840,000	$        60,000	$      120,000		$       1,020,000
Research and development asset		$                       -	$                 -	$      200,000		$          200,000
Equipment (net)		$           320,000	$      105,000			$          425,000
Goodwill		$                       -	$                 -	$        27,000		$            27,000
Totals		$        2,495,000	$      354,000			$       2,574,000
Accounts payable		$          (110,000)	$      (34,000)			$        (144,000)
Notes payable		$          (370,000)	$      (50,000)	$          5,000		$        (415,000)
Common stock		$          (460,000)	$      (50,000)	$        50,000		$        (460,000)
Additional paid-in capital		$          (695,000)	$      (30,000)	$        30,000		$        (695,000)
Retained earnings		$          (860,000)	$    (190,000)	$      190,000		$        (860,000)
Totals		$       (2,495,000)	$    (354,000)	$      752,000	$      752,000	$     (2,574,000)

Table: (3)

c.

To determine

Explain the way in which the balance sheet accounts compare across parts (a) and (b).

Explanation of Solution

The balance sheet across parts (a) and (b) are however similar and only the presentation differs.

Part (a) represents the combined balances only while part (b) represents separate balances as well.