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a.
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.
a.
![Check Mark](/static/check-mark.png)
Explanation of Solution
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 | |||
$ 77,500 | ||||
Liabilities | $ 180,000 | |||
Common stock | $ 250,000 | |||
Additional paid-in capital | $ 750,0000 | |||
$ 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:
Thus, the fair value of the consideration transferred in this combination is $1,000,000.
b.
Prepare a post-acquisition column of accounts for company P.
b.
![Check Mark](/static/check-mark.png)
Explanation of Solution
The post-combination
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) | ||||
$ (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.
Prepare a worksheet to produce a consolidated balance sheet as of the acquisition date.
c.
![Check Mark](/static/check-mark.png)
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)
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