Illustrative Example 1:

Assume BigNet Company specializes in communications equipment and business

software that provide web-based applications for retail companies. BigNet seeks to expand
its operations and plans to acquire Smallport on December 31, 2006. Smallport
Company owns computers, telecommunications equipment, and software that customize
website billing and ordering systems for their customers. BigNet hopes to expand
Smallport’s customer contracts, utilize its recently developed software, and create other
synergies by combining with Smallport.

Following are the account balances of BigNet Company and Smallport Company as of
December 31, 2006 and the fair values of Smallport Company’s assets and liabilities are

BigNet
Company Smallport Company
Book Value Book value Fair value
Current assets $ 1,100,000 $ 300,000 $ 300,000
Computers and equipment (net) 1,300,000 400,000 600,000
Capitalized software (net) 500,000 100,000 1,200,000
Customer contracts 0 0 700,000
Notes payable (300,000 ) (200,000 ) (250,000 )
   
Common stock—$10 par value $(1,600,000)
Common stock—$5 par value $ (100,000)
Additional paid-in capital (40,000) (20,000)
Retained earnings, 1/1/2006 (870,000) (370,000)
Dividends declared 110,000 10,000
Revenues (1,000,000) (500,000)
Expense 800,000 380,000
Owners’ Equity 12/31/2006 $(2,600,000) $(600,000)
Retained earnings, 12/31/2006 (960,000) * (480,000) *
also listed.

*Retained earnings balance after closing out revenues, expenses, and dividends.
Required:
a. Prepare the necessary journal entries assume Smallport is dissolved (BigNet
dissolves SmallPort)
b. Prepare a worksheet to consolidate the accounts of a subsidiary if dissolution not
takes place (SmallPort retains separate legal entity)