Chapter 2, Problem 34P

a.

To determine

Prepare Company P’s entries to account for the consideration transferred to the former owners of Company S, the direct combination costs, and the stock issue and registration costs.

Explanation of Solution

Journal entries to record acquisition of assets and liabilities:

General Journal
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
i)	Receivables and inventory		$             180,000
	Cash		$              85,000
	Property, plant and equipment		$             600,000
	Research and development asset		$             100,000
	Trademarks		$            200,000
	Goodwill		$                77,500
	Liabilities			$ 180,000
	Common stock			$        250,000
	Additional paid-in capital $\left(\$1,000,000-\left(50,000\times \$5\right)\right)$			$       750,0000
	Contingent liability $\left(\text{PV}\text{of}\$130,000\text{at}4\%\right)$			$       62,500
	(to record the assets and liabilities acquired)
ii)	Professional service		$               15,000
	Cash			$        15,000
	(being Stock issuance cost paid)
iii)	Additional paid-in capital		$               9,000
	Cash			$        9,000
	(being Stock issuance cost paid)

Table: (1)

Computation of the fair value of the consideration transferred:

$\begin{array}{c}\text{Fair}\text{value}\text{of}\text{consideration}\text{=}\left(\text{50,000}\text{×}\text{\$20}\right)\\ =\$1,000,000\end{array}$

Thus, the fair value of the consideration transferred in this combination is $1,000,000.

b.

To determine

Prepare a post-acquisition column of accounts for company P.

Explanation of Solution

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

Particulars		Company P	Company S	Consolidated Entries		Consolidated Balances
Revenues		$        (1,200,000)				$    (1,200,000)
Expenses		$             890,000				$        890,000
Net income		$           (310,000)				$       (310,000)
Retained earnings, 1/1		$           (950,000)				$       (950,000)
Net income		$           (310,000)				$       (310,000)
Dividends declared		$               90,000				$          90,000
Retained earnings,12/31		$        (1,170,000)				$    (1,170,000)
Cash		$               86,000	$        85,000	$                 -		$        171,000
Receivables and inventory		$             750,000	$      190,000		$       10,000	$        930,000
Property, plant, and equipment		$          1,400,000	$      450,000	$      150,000		$     2,000,000
Investment in Company S		$          1,062,500			$     705,000
					$     357,500
Research and development asset				$      100,000		$        100,000
Goodwill				$        77,500		$          77,500
Trademarks		$             300,000	$      160,000	$        40,000		$        500,000
Total assets		$          3,598,500	$      885,000			$     3,778,500
Liabilities		$           (500,000)	$    (180,000)			$       (680,000)
Contingent liability		$             (62,500)				$         (62,500)
Common stock		$           (650,000)	$    (200,000)	$      200,000		$       (650,000)
Additional paid-in capital		$        (1,216,000)	$      (70,000)	$        70,000		$    (1,216,000)
Retained earnings		$        (1,170,000)	$    (435,000)	$      435,000		$    (1,170,000)
Total liabilities and equities		$        (3,598,500)	$    (885,000)	$   1,072,500	$  1,072,500	$     3,778,500

Table: (2)

c.

To determine

Prepare a worksheet to produce a consolidated balance sheet as of the acquisition date.

Explanation of Solution

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

Particulars		Company P	Company S	Consolidated Entries		Consolidated Balances
Revenues		$        (1,200,000)				$    (1,200,000)
Expenses		$             890,000				$        890,000
Net income		$           (310,000)				$       (310,000)
Retained earnings, 1/1		$           (950,000)				$       (950,000)
Net income		$           (310,000)				$       (310,000)
Dividends declared		$               90,000				$          90,000
Retained earnings,12/31		$        (1,170,000)				$    (1,170,000)
Cash		$               86,000	$        85,000	$                 -		$        171,000
Receivables and inventory		$             750,000	$      190,000		$       10,000	$        930,000
Property, plant, and equipment		$          1,400,000	$      450,000	$      150,000		$     2,000,000
Investment in Company S		$          1,062,500			$     705,000
					$     357,500
Research and development asset				$      100,000		$        100,000
Goodwill				$        77,500		$          77,500
Trademarks		$             300,000	$      160,000	$        40,000		$        500,000
Total assets		$          3,598,500	$      885,000			$     3,778,500
Liabilities		$           (500,000)	$    (180,000)			$       (680,000)
Contingent liability		$             (62,500)				$         (62,500)
Common stock		$           (650,000)	$    (200,000)	$      200,000		$       (650,000)
Additional paid-in capital		$        (1,216,000)	$      (70,000)	$        70,000		$    (1,216,000)
Retained earnings		$        (1,170,000)	$    (435,000)	$      435,000		$    (1,170,000)
Total liabilities and equities		$        (3,598,500)	$    (885,000)	$   1,072,500	$  1,072,500	$     3,778,500

Table: (3)