Chapter 2, Problem 63P

a.

To determine

Prepare the journal entry to record the acquisition.

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:

Date	Account title and Explanation	Post Ref	Debit ($)	Credit ($)
	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:

$\begin{array}{c}\text{Equity investment}=60,000\times \$25\\ =\$1,500,000\end{array}$

b.

To determine

Prepare the consolidated balance sheet on the date of acquisition.

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 receivable		300,000		120,000						420,000
Inventory		700,000		600,000						1,300,000
Equity investment		1,500,000					[E]	880,000		0
							[A]	620,000
PPE, net		2,000,000		1,000,000	[A]	100,000				$3,100,000
Customer List					[A]	160,000				160,000
Brand name					[A]	240,000				240,000
Goodwill					[A]	220,000				220,000
		$4,700,000		$1,800,000						$5,720,000
Liabilities’ and Equity
Accounts payable		$150,000		$120,000						$270,000
Accrued liabilities		250,000		200,000						450,000
Long-term liabilities		1,600,000		600,000						2,200,000
Deferred tax liability							[A]	100,000		100,000
Common stock		500,000		80,000	[E]	80,000				500,000
APIC		1,000,000		200,000	[E]	200,000				1,000,000
Retained earnings		1,200,000		600,000	[E]	600,000				1,200,000
		$4,700,000		$1,800,000		1,600,000		1,600,000		$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:

$\begin{array}{c}\text{Deferred tax liability}=20\%\text{ of }\$500,000\\ =\$100,000\end{array}$

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

$\begin{array}{c}\text{Fair value}=\text{Common stock}+\text{APIC}+\text{Retained earning}s+\text{Unrecorded assets}\\ =\$80,000+\$200,000+\$600,000+\$500,000\\ =\$1,380,000\end{array}$

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		$\underset{\_}{\underset{\_}{\$220,000}}$