ADVANCED ACCOUNTING
ADVANCED ACCOUNTING
4th Edition
ISBN: 9781618533128
Author: Halsey
Publisher: Cambridge Business Publishers
Question
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Chapter 2, Problem 63P

a.

To determine

Prepare the journal entry to record the acquisition.

a.

Expert Solution
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Explanation of Solution

An acquisition is when one company acquires most or all of the shares of another company to gain control over that company. Acquisition accounting is a set of formal directives defining how an acquired company's assets, liabilities, non-controlling interest (NCI) and goodwill must be recorded by the purchaser on its consolidated financial statement.

The required journal entry to record acquisition is as follows:

DateAccount title and ExplanationPost RefDebit ($)Credit ($)
 Equity investment $1,500,000 
 Common stock  $120,000
 APIC  $1,380,000
 (To record the acquisition)   

Table (1)

Working Notes:

Number of shares issued by the parent company of its par value of $2 is 60,000.

Fair value per share is $ 25.

Calculate the equity investment in subsidiary:

Equity investment=60,000×$25=$1,500,000

b.

To determine

Prepare the consolidated balance sheet on the date of acquisition.

b.

Expert Solution
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Explanation of Solution

Consolidated financial statements are a group of entities financial statements that are presented as those of a single economic entity. They are the financial statements of a group in which the parent company and its subsidiaries introduce their assets, liabilities, equity, revenue, expenses and cash flows as those of a single business organization.

A consolidated balance sheet provides a parent company's assets and liabilities and all of its subsidiaries in a legal document, without any differentiation on which items pertain to which companies.

The consolidated balance sheet on the date of acquisition is shown below:

      Consolidation entries  
  Parents Subsidiary Dr Cr Consolidated
Assets 
Cash$200,000$80,000$280,000
Accounts receivable300,000120,000420,000
Inventory700,000600,0001,300,000
Equity investment1,500,000[E]880,0000
[A]620,000
PPE, net2,000,0001,000,000[A]100,000$3,100,000
Customer List[A]160,000160,000
Brand name[A]240,000240,000
Goodwill[A]220,000220,000
 
 $4,700,000$1,800,000$5,720,000
Liabilities’ and Equity
Accounts payable$150,000$120,000$270,000
Accrued liabilities250,000200,000450,000
Long-term liabilities1,600,000600,0002,200,000
Deferred tax liability[A]100,000100,000
Common stock500,00080,000[E]80,000500,000
APIC1,000,000200,000[E]200,0001,000,000
Retained earnings1,200,000600,000[E]600,0001,200,000
  
 $4,700,000$1,800,0001,600,0001,600,000$5,720,000
           

Working Notes:

Number of shares issued by the parent company of its par value of $2 is 60,000.

Fair value per share is $ 25.

Property, Plant and Equipment (PPE) assets are undervalued by $100,000.

Unrecorded Customer List valued at $160,000.

Unrecorded Brand name asset valued at $240,000.

Effective tax rate is 20%.

Total book tax difference of $500,000 is established.

Calculate deferred tax liability:

Deferred tax liability=20% of $500,000=$100,000

Calculate the fair value of the identifiable net assets (FVINA):

Fair value=Common stock+APIC+Retained earnings+Unrecorded assets=$80,000+$200,000+$600,000+$500,000=$1,380,000

Calculate goodwill:

Particulars Amount ($)
Purchase price $1,500,000
Less: Fair value of identifiable net assets(1,380,000) 
Less: Deferred tax liability(100,000)1,280,000
Goodwill $220,000__

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