Tut 2- AFA

Problem 24. Following are preacquisition financial balances for Padre Company and Sol Company as of
December 31. Also included are fair values for Sol Company accounts.

On December 31, Padre acquires Sol’s outstanding stock by paying $360,000 in cash and issuing
10,000 shares of its own common stock with a fair value of $40 per share. Padre paid legal and
accounting fees of $20,000 as well as $5,000 in stock issuance costs.
Determine the value that would be shown in Padre’s consolidated financial statements for each
of the accounts listed.

Account
Inventory Revenues
Land Additional paid-in capital
Buildings and equipment Expenses
Franchise agreements Retained earnings, 1/1
Goodwill Retained earnings, 12/31
Consolidated Amounts = Book Value of Parent + Fair value of the Subsidiary 

Inventory=>Cosolidated = 410k+260k= 670,000

Land=> Cosolidated =600+110=710,000

Building and Equipment => Cosolidated =600+330=930,000

Franchise Agreements=> Cosolidated =220+220=440,000

Goodwill:

Total Consideration Given =360,000 Cash+ (10,000 shares *40$ market value)=760,000

Less: Net assets fair value= Asset FV-Liabliities FV=120+300+260+110+330+220-120-30-510=680

 Goodwill=760-680=80,000
 Revenues => Consolidated = 960+330=1,290,000

Additional Paid-in Capital (Should be Parent's only)

Pre-accquisition balance = 70,000

Add: Additional Excess =(10,000 share* 40)-(10,000 shares *20)=200,000

Less: Stock inssurance cost= 5,000

=> Consolidated= 265,000

Exprenses

Padre's Pre-acquisition Balance=920,000

Add: Legal and Accounting Cost =20,000

Add: Sol's Expenses = 310,000

---Consolidated =1,250,000

Retained Earnings, 1/1 (Should be parent's only)

Consolidated =390,000

29. Pratt Company acquired all of Spider, Inc.’s outstanding shares on December 31, 2018, for $495,000
cash. Pratt will operate Spider as a wholly owned subsidiary with a separate legal and accounting
identity. Although many of Spider’s book values approximate fair values, several of its accounts
have fair values that differ from book values. In addition, Spider has internally developed assets
that remain unrecorded on its books. In deriving the acquisition price, Pratt assessed Spider’s fair
and book value differences as follows:

Book Values Fair Values

Computer
software . . . . . . . . . . . . . . . . . $ 20,000 $ 70,000
.............

Equipment . . . . . . . . . . . . . . . 30,000
40,000
......................

Client 100,000
contracts . . . . . . . . . . . . . . . . . –0–
................

In-process research and 40,000

–0–
development

Notes (65,000)
payable . . . . . . . . . . . . . . . . . . (60,000)
................

At December 31, 2018, the following financial information is available for consolidation:
 Prepare a consolidated balance sheet for Pratt and Spider as of December 31, 2018.

Consideration transferred at FV 495,000

BV (ttoal asset- total liablility) 265,000

 Excess fair over BV 230,000

Allocation of excess fair value to specific asset and liablity

To Computer software 50,000

To equipment (10,000)

To Client contracts 100,000

To in-process reseach and development 40,000

To note payable (5,000) 175,000

=> Goodwill 55,000

 Pratt company and Spider, inc.

Consolidated balance sheet

31/12/2018

Assets
Cash $ 54,000
Receivables 168,000
Inventory 230,000
Computer software 280,000
Buildings (net) 725,000
Equipment (net) 338,000
Client contracts 100,000
Research and development asset 40,000
Goodwill 55,000
Total assets $ 1,990,000

Liabilities and Owners' Equity

Accounts payable $ 113,000
Notes payable 575,000
Common stock 380,000
Additional paid-in capital 170,000
Retained earnings 752,000
Total liabilities and equities $ 1,990,000

30. Allerton Company acquires all of Deluxe Company’s assets and liabilities for cash on January
1, 2018, and subsequently formally dissolves Deluxe. At the acquisition date, the following book and fair
values were available for the Deluxe Company accounts:
 Prepare Allerton’s entry to record its acquisition of Deluxe in its accounting records assuming
the following cash exchange amounts:
1. $145,000.

Case 1:

Deluxe fair value (consideration transferred) = $145,000

Fair value of net identifiable assets = 120,000

Excess to goodwill = $25,000

Required journal entry is shown below:

Accounting Title Debit ($) Credit ($)

Current Assets A/c 60,000
Building A/c 50,000
Land A/c 20,000
Trademark A/c 30,000
Goodwill A/c 25,000
To Liabilities A/c 40,000
To Cash A/c 145,000

2. $110,000.

Case 2:

Consideration transferred for Deluxe = 110,000

Fair value of net identifiable assets = 120,000

Gain on bargain purchase = 10,000

Required journal entry is shown below:

 Accounting Title Debit ($) Credit ($)
Current Assets A/c 60,000
Building A/c 50,000
Land A/c 20,000
Trademark A/c 30,000
To Gain on bargain purchase A/c 10,000
To Liabilities A/c 40,000
To Cash A/c 110,000

31. On June 30, 2018, Streeter Company reported the following account balances:

On June 30, 2018, Princeton Company paid $310,800 cash for all assets and liabilities of Streeter,
which will cease to exist as a separate entity. In connection with the acquisition, Princeton paid
$15,100 in legal fees. Princeton also agreed to pay $55,600 to the former owners of Streeter contingent
on meeting certain revenue goals during 2019. Princeton estimated the present value of its
probability adjusted expected payment for the contingency at $17,900.
In determining its offer, Princeton noted the following pertaining to Streeter:
∙ It holds a building with a fair value $43,100 more than its book value.
∙ It has developed a customer list appraised at $25,200, although it is not recorded in its financial
records.
∙ It has research and development activity in process with an appraised fair value of $36,400.
However, the project has not yet reached technological feasibility and the assets used in the
activity have no alternative future use.
∙ Book values for the receivables, inventory, equipment, and liabilities approximate fair values.
Prepare Princeton’s accounting entries to record the combination with Streeter.

1. Preparation of the First Entry to Record the acquisition of Streeter company.

First step is to calculate Goodwill on Acquisition

Acquisition cost $310,800

Add Contingent obligation performance $17,900

Total Acquisition cost $328,700

Less Fair value of Streeter company:

Receivables $ 83,900

Inventory $70,250

Building (net) $122,000

($78,900+$43,100)

Equipment (net) $24,100

Customer list $25,200

Capitalized R&D $36,400

Current liabilities ($12,900 )

Long-term liabilities ($54,250 ) ($294,700)

Goodwill $34,000

($328,700-$294,700)

Now let prepare the First Entry to Record the acquisition of Streeter company.

Dr Receivables $ 83,900

Dr Inventory $70,250

Dr Building (net) $122,000

($78,900+$43,100)
Dr Equipment (net) $24,100

Dr Customer list $25,200

Dr Capitalized R&D $36,400

Dr Goodwill $34,000

Cr Current liabilities $12,900

Cr Long-term liabilities $54,250

Cr Contingent obligation performance $17,900

Cr Acquisition cost $310,800

(To record acquisition of Streeter Company)

2. Preparation of the Second Entry to Record the legal fees related to the combination

Dr Combination expense (Legal fees) $15100

Cr Cash $15,100

(To record payment of Legal fees)

33. On January 1, NewTune Company exchanges 15,000 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.
NewTune also paid $25,000 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:
 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 postcombination 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.

c. How do the balance sheet accounts compare across parts (a) and (b)?

34. On December 31, Pacifica, Inc., acquired 100 percent of the voting stock of Seguros
Company.

Pacifica will maintain Seguros as a wholly owned subsidiary with its own legal and accounting

identity. The consideration transferred to the owner of Seguros included 50,000 newly issued

Pacifica common shares ($20 market value, $5 par value) and an agreement to pay an additional

$130,000 cash if Seguros meets certain project completion goals by December 31 of the
following

year. Pacifica estimates a 50 percent probability that Seguros will be successful in meeting these

goals and uses a 4 percent discount rate to represent the time value of money.

Immediately prior to the acquisition, the following data for both firms were available:
 In addition, Pacifica assessed a research and development project under way at Seguros to have
a fair value of $100,000. Although not yet recorded on its books, Pacifica paid legal fees of $15,000 in
connection with the acquisition and $9,000 in stock issue costs.
Prepare the following:
a. Pacifica’s entries to account for the consideration transferred to the former owners of Seguros,
the direct combination costs, and the stock issue and registration costs. (Use a 0.961538 present
value factor where applicable.)
b. A postacquisition column of accounts for Pacifica.
c. A worksheet to produce a consolidated balance sheet as of the acquisition date.