Consolidation of Financial Information Flashcards
The following book and fair values were available for Westmont Company as of March 1.
- Inventory $644,750 book value $609k fair value
- Land $779,250 book value $1,086,750 fair value
- Buildings $1,770,000 book value $2,138,250 fair value
- Customer relationships $0 book value $842,250 fair value
- Accounts payable ($102,000) book value and fair value
- Common stock ($2,000,000) book value
- Additional paid-in capital ($500,000) book value
- Retained earnings, 1/1 ($424,500) book value
- Revenues ($457,000) book value
- Expenses $289,500 book value
Arturo Company pays $4,130,000 cash and issues 28,200 shares of its $2 par value common stock (fair value of $50 per share) for all of Westmont’s common stock in a merger, after which Westmont will cease to exist as a separate entity. Stock issue costs amount to $32,400 and Arturo pays $49,800 for legal fees to complete the transaction.
Prepare Arturo’s journal entries to record its acquisition of Westmont. (If no entry is required for a transaction/event, select “No journal entry required” in the first account field.)
JE - Acquisition of Westmont Company
At acquisition, assets are recorded at fair value while liabilities are entered at their book value. Goodwill is any excess amount not directly attributed to an asset.
JE - Legal fees related to the combination
JE - Payment of stock issuance costs
Stock issuance costs are recorded against Additional Paid-in Captial
Following are pre-acquisition financial balances for Padre Company and Sol Company as of December 31. Also included are fair values for Sol Company accounts.
Account - Padre Co. book value | Sol Co. book value | Sol Co. fair value (at 12/31)
- Cash - 424,000 | 64,600 | 64,400
- Receivables - 269,250 | 307,000 | 307,000
- Inventory - 455,000 | 252,000 | 307,600
- Land - 655,000 | 170,000 | 146,100
- Building & equipment, net - 617,500 | 292,000 | 353,100
- Franchise agreements - 257,000 | 235,000 | 274,000
- Accounts payable - (394,000) | (152,000) | (152,000)
- Accrued expenses - (181,000) | (53,000) | (53,000)
- Long-term liabilities - (917,5000) | (487,500) | (487,500)
- Common stock, $20 par - (660,000) | N/A
- Common stock, $5 par - N/A | (210,000)
- Additional paid-in capital - (70,000) | (90,000)
- Retained earnings, 1/1 - (400,000) | (302,000)
- Revenues - (1,019,250) | (396,900)
- Expenses - 964,000 | 371,000
On December 31, Padre acquires Sol’s outstanding stock by paying $184,000 in cash and issuing 16,800 shares of its own common stock with a fair value of $40 per share. Padre paid legal and accounting fees of $25,500 as well as $6,500 in stock issuance costs.
Determine the value that would be shown in Padre’s consolidated financial statements for each of the accounts listed. (Input all amounts as positive values.)
Inventory
Land
Buildings & equipment
Franchise agreements
Goodwill
Revenues
Additional paid-in capital
Expenses
Retained earnings, 1/1
Retained earnings, 12/31
On January 1, 2021, Casey Corporation exchanged $3,170,000 cash for 100 percent of the outstanding voting stock of Kennedy Corporation. Casey plans to maintain Kennedy as a wholly owned subsidiary with separate legal status and accounting information systems.
- $3,170,000 Fair value of Kennedy (consideration transferred)*
- (2,600,000) Carrying amount acquired*
- =$570,000 Excess fair value*
- 324,000 to buildings (undervalued)*
- (198,000) to licensing agreements (overvalued)*
- =$444,000 to goodwill (indefinite life)*
At the acquisition date, Casey prepared the following fair-value allocation schedule:
Accounts - Casey | Kennedy
- Cash - 472,000 | 184,500
- Accounts receivable - 1,235,000 | 316,000
- Inventory - 1,470,000 | 165,500
- Investment in Kennedy - 3,170,000 | 0
- Buildings, net - 5,820,000 | 1,920,000
- Licensing agreements - 0 | 3,340,000
- Goodwill - 799,000 | 0
- Accounts payable - (336,000) | (406,000)
- Long-term debt - (3,630,000) | (3,010,000)
- Common stock - (3,000,000) | (1,000,000)
- Additional paid-in capital - 0 | (500,000)
- Retained earnings - (6,000,000) | (1,100,000)
Immediately after closing the transaction, Casey and Kennedy prepared the following postacquisition balance sheets from their separate financial records (credit balances in parentheses).
Prepare an acquisition-date consolidated balance sheet for Casey Corporation and its subsidiary Kennedy Corporation. (For accounts where multiple consolidation entries are required,combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Input all amounts as positive values.)
Worksheet for a consolidated Balance Sheet
On January 1, New Tune Company exchanges 17,049 shares of its common stock for all of the outstanding shares of On-the-Go, Inc. Each of NewTune’s shares has a $4 par value and a $50 fair value. The fair value of the stock exchanged in the acquisition was considered equal to On-the-Go’s fair value. New Tune also paid $37,300 in stock registration and issuance costs in connection with the merger.
Several of On-the-Go’s accounts’ fair values differ from their book values on this date (credit balances in parentheses):
Account - Book value | Fair value
- Receivables - 77,500 | 72,400
- Trademarks - 108,000 | 238,500
- Record music catalog - 75,500 | 197,750
- In-process research & development - 0 | 262,500
- Notes payable - (68,500) | (60,400)
Precombination book values for the two companies are as follows:
Account - New Tune | On-the-Go
- Cash - 73,250 | 44,000
- Receivables - 152,750 | 77,500
- Trademarks - 462,000 | 108,000
- Record music catalog - 875,000 | 75,500
- Equipment, net - 360,000 | 117,000
- Accounts payable - (172,000) | (53,000)
- Notes payable - (462,000) | (68,500)
- Common stock - (400,000) | (50,000)
- Additional paid-in capital - (30,000) | (30,000)
- Retained earnings - (859,000) | (220,500)
a. Assume that this combination is a statutory merger so that On-the-Go’s accounts will be transferred to the records of NewTune. On-the-Go will be dissolved and will no longer exist as a legal entity. Prepare a post combination balance sheet for NewTune as of the acquisition date.
b. Assume that no dissolution takes place in connection with this combination. Rather, both companies retain their separate legal identities. Prepare a worksheet to consolidate the two companies as of the combination date.
On January 1, New Tune Company exchanges 17,049 shares of its common stock for all of the outstanding shares of On-the-Go, Inc. Each of NewTune’s shares has a $4 par value and a $50 fair value. The fair value of the stock exchanged in the acquisition was considered equal to On-the-Go’s fair value. New Tune also paid $37,300 in stock registration and issuance costs in connection with the merger.
Several of On-the-Go’s accounts’ fair values differ from their book values on this date (credit balances in parentheses):
Account - Book value | Fair value
- Receivables - 77,500 | 72,400
- Trademarks - 108,000 | 238,500
- Record music catalog - 75,500 | 197,750
- In-process research & development - 0 | 262,500
- Notes payable - (68,500) | (60,400)
Precombination book values for the two companies are as follows:
Account - New Tune | On-the-Go
- Cash - 73,250 | 44,000
- Receivables - 152,750 | 77,500
- Trademarks - 462,000 | 108,000
- Record music catalog - 875,000 | 75,500
- Equipment, net - 360,000 | 117,000
- Accounts payable - (172,000) | (53,000)
- Notes payable - (462,000) | (68,500)
- Common stock - (400,000) | (50,000)
- Additional paid-in capital - (30,000) | (30,000)
- Retained earnings - (859,000) | (220,500)
b. Assume that no dissolution takes place in connection with this combination. Rather, both companies retain their separate legal identities. Prepare a worksheet to consolidate the two companies as of the combination date.
Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in
a. a worksheet
b. Lisa’s general journal
c. Victoria’s general journal
d. Victoria’s secret consolidation journal
e. the general journals of both companies
a worksheet
How are direct and indirect costs accounted for when applying the acquisition method for a business combination?
Option A
With respect to recognizing and measuring the fair value of a business combination in accordance with the acquisition method of accounting, which of the following should the acquirer consider when determining fair value?
a. only assets received by the acquirer
b. only consideration transferred by the acquirer
c. the consideration transferred by the acquirer and the fair value of assets received less liabilities assumed
d. the par value of stock transferred by the acquirer, and the book value of identifiable assets transferred by the entity acquired
e. the book value of identifiable assets transferred to the acquirer as part of the business combination less any liabilities assumed
c. the consideration transferred by the acquirer and the fair value of assets received less liabilities assumed
Wilkins Inc. acquired 100% of the voting common stock of Granger Inc. on January 1, 2021. The book value and fair value of Granger’s accounts on that date (prior to creating the combination) are as follows, along with the book value of Wilkins’s accounts:
Assume that Wilkins issued 13,000 shares of common stock, with a $5 par value and a $46 fair value, to obtain all of Granger’s outstanding stock. In this acquisition transaction, how much goodwill should be recognized?
$138,000
Prior to being united in a business combination, Taunton Inc. and Eubanks Corp. had the following stockholders’ equity figures:
Taunton issued 62,000 new shares of its common stock valued at $2.75 per share for all of the outstanding stock of Eubanks.
Assume that Taunton acquired Eubanks on January 1, 2020 and that Eubanks maintains a separate corporate existence. At what amount did Taunton record the investment in Eubanks?
$170,500
Which of the following statements is true regarding a statutory merger?
a. the original companies dissolve while remaining as separate divisions of a newly created company
b. both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company
c. the acquired company dissolves as a separate corporation and becomes a division of the acquiring company
d. the acquiring company acquires the stock of the acquired company as an investment
e. a statutory merger is no longer a legal option
c. the acquired company dissolves as a separate corporation and becomes a division of the acquiring company
In a transaction accounted for using the acquisition method where consideration transferred exceeds book value of the acquired company, which statement is true for the acquiring company with regard to its investment?
a. Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is allocated to goodwill.
b. Net assets of the acquired company are maintained at book value and any excess of consideration transferred over book value of net assets acquired is allocated to goodwill.
c. Acquired assets are revalued to their fair values. Acquired liabilities are maintained at book values. Any excess is allocated to goodwill.
d. Acquired long-term assets are revalued to their fair value. Any excess is allocated to goodwill.
e. Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is deducted from additional paid-in capital.
a. Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is allocated to goodwill.
The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands):
On December 31, 2021, Campbell obtained a loan for $650 and used the proceeds, along with the transfer of 35 shares of its $10 par value common stock, in exchange for all of Newton’s common stock. At the time of the transaction, Campbell’s common stock had a fair value of $40 per share.
In connection with the business combination, Campbell paid $25 to a broker for arranging the transaction and $30 in stock issuance costs. At the time of the transaction, Newton’s equipment was actually worth $1,450 but its buildings were only valued at $590.
Compute the consolidated revenues for 2021.
a. $300
b. $700
c. $720
d. $2,600
e. $3,300
e. $3,300
On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:
Note: Parentheses indicate a credit balance.
In Moody’s appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary’s books: Inventory by $10, Land by $40, and Buildings by $60.
If Osorio retains a separate corporate existence, what amount was recorded as the investment in Osorio?
s. $400
b. $440
c. $800
d. $820
e. $1,030
c. $800
McCoy has the following account balances as of December 31, 2020 before an acquisition transaction takes place.
The fair value of McCoy’s Land and Buildings are $650,000 and $600,000, respectively. On December 31, 2020, Ferguson Company issues 30,000 shares of its $10 par value ($30 fair value) common stock in exchange for all of the shares of McCoy’s common stock. Ferguson paid $12,000 for costs to issue the new shares of stock. Before the acquisition, Ferguson has $800,000 in its common stock account and $350,000 in its additional paid-in capital account.
What will the consolidated common stock account be as a result of this acquisition?
a. $300,000
b. $800,000
c. $1,100,000
d. $1,400,000
e $1,700,000
c. $1,100,000
