Exam 1

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Monroe College *

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AC433

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Finance

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Apr 3, 2024

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E1.1 Question Investment in Trading Securities The Coca-Cola Company’s December 31, 2020, balance sheet reports investments in trading securities at $40 million, with net unrealized gains of $5 million. Required a. How much did Coca-Cola pay for the trading securities reported on its 2020 balance sheet? b. Where are unrealized gains and losses on trading securities reported in Coca-Cola’s financial statements? c. Assume the trading securities on hand at the end of 2020 were acquired during 2020. Prepare the summary journal entries made by Coca-Cola to record events related to these trading securities. d. Assume the securities are sold for $42 million in 2021. Prepare the journal entry to record the sale. E1.1 Solution Investment in Trading Securities (in millions) a. $40 – 5 = $35 b. Unrealized gains and losses on trading securities are reported in income. c. Investment in trading securities 35 Cash 35 Investment in trading securities 5 Gain on trading securities (income) 5 d. Cash 42 Loss on trading securities (income) 3 Investment in trading securities 45 E1-3 A Question Investment in Trading and AFS Securities In 2019, a company purchases debt securities at a par value of $500,000. Their year-end value is $520,000. In 2020, these securities are sold for $525,000 and new securities are purchased for $700,000. At the end of 2020, the securities have not yet been sold, and have a value of $600,000. Required Prepare the journal entries to record the above information for 2019 and 2020, assuming that: a. The securities are categorized as trading securities. b. The securities are categorized as AFS securities, and (1) the company intends to sell the securities held at the end of 2020 before the loss is recovered, or (2) the company intends to hold the securities, and their decline in value is attributed to expected credit losses, or (3) the company intends to hold the securities, and their decline in value is attributed to a rise in market interest rates.

E1.3 Solution Investment in Trading and Available-for-Sale Securities a. 2022 entrie s Investment in trading securities 500,000 Cash 500,000 Investment in trading securities 20,000 Gains on trading securities (income) 20,000 2023 entries Cash 525,000 Investment in trading securities 520,000 Gains on trading securities (income) 5,000 Investment in trading securities 700,000 Cash 700,000 Losses on trading securities (income) 100,000 Investment in trading securities 100,000 b. (1) 2022 entrie s Investment in AFS securities 500,000 Cash 500,000 Investment in AFS securities 20,000 Gains on AFS securities (OCI) 20,000 2023 entries Cash 525,000 Reclassification of gains on AFS securities (OCI) 20,000 Investment in AFS securities 520,000 Gains on AFS securities (income) 25,000 Investment in AFS securities 700,000 Cash 700,000 Losses on AFS securities (income) 100,000 Investment in AFS securities 100,000 (2) 2022 entries are the same as in (1). 2023 entries Cash 525,000 Reclassification of gains on AFS securities (OCI) 20,000 Investment in AFS securities 520,000 Gains on AFS securities (income) 25,000 Investment in AFS securities 700,000 Cash 700,000 Losses on AFS securities (income) 100,000 Allowance for credit losses on AFS securities (contra to investment account) 100,000

(3) 2022 entries are the same as in (1). 2023 entries Cash 525,000 Reclassification of gains on AFS securities (OCI) 20,000 Investment in AFS securities 520,000 Gains on AFS securities (income) 25,000 Investment in AFS securities 700,000 Cash 700,000 Losses on AFS securities (OCI) 100,000 Investment in AFS securities 100,000 E1.4 Financial Statement Display of AFS Debt Securities A company buys debt securities at a par value of $400,000, and designates them as AFS securities. At the end of the year, the company still holds the securities, but their fair value has declined to $390,000. Required For each circumstance below, indicate where the loss, if any, is reported, and how the investment is displayed on the company’s year-end balance sheet. a. The company intends to sell the securities before the loss in value is recovered. How is the loss reported? How is the investment reported at year-end on the balance sheet? b. The company does not intend to sell the securities before the loss in value is recovered, and 1. The loss is determined to be entirely an expected credit loss. 2. The loss is $7,000 credit-related and $3,000 market-related E1.4 Solution Financial Statement Display of AFS Debt Securities a. The loss is a direct reduction in the investment balance and is reported in income. Investment in AFS securities………………………………………….. $390,000 b. (1) The loss is reported in an allowance account, and is reported in income. Investment in AFS securities $400,000 Less: Allowance for expected credit losses ( 10,000) Net investment in AFS securities……………………… $390,000 (2) The credit-related loss is reported in an allowance account, and is reported in income. The market-related loss is a direct reduction in the investment balance, and is reported in OCI.

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Investment in AFS securities ($400,000 - $3,000) $397,000 Less: Allowance for expected credit losses ( 7,000) Net investment in AFS securities……………………… $390,000 E1-5 Queston Investment in AFS Securities The following information appears on Anderson Corporation’s balance sheet at December 31, 2023, with comparative information for December 31, 2022: 2023 2022 Noncurrent assets: AFS securities $440,000 $510,000 Equity: Accumulated other comprehensive income (AOCI) Unrealized gains on AFS securities 85,000 70,000 Anderson’s 2023 income statement reports the following: Gains on sale of AFS securities 20,000 Anderson’s 2023 statement of comprehensive income reports the following information: Unrealized gains on AFS securities 20,000 Reclassification of unrealized gains on AFS securities (15,000) Anderson did not make any new investments in AFS securities in 2023. Required a. Calculate the original cost of the AFS securities held on December 31, 2023. b. Calculate the cash Anderson received on the sale of AFS securities in 2023. E1-5 Solution E1.5 Investment in AFS Securities a. $440,000 - $85,000 = $335,000. Historical cost = fair value less unrealized gains. b. Cash received = $85,000, derived by reconstructing the summary entry to record sales of AFS securities: Cash 95,000 Reclassification of unrealized gains on AFS securities (OCI) 15,000 Gain on sale of AFS securities (income) 20,000 Investment in AFS securities 90,000 The credit to investment in AFS securities is $90,000, because the investment balance declined by $70,000 in 2020, but $20,000 in unrealized gains was recorded in OCI. $510,000 + $20,000 – X = $440,000; X = $90,000. The amount of cash received is the number that balances the entry. The other numbers are given in the exercise. E1-6

Held-to-Maturity Investments On January 1, 2022, a company pays $105,346 for a 3-year corporate bond with a face value of $100,000. The bond pays interest at 8 percent on December 31 of each year, and the principal is due on December 31, 2024. The investment yields a 6 percent compound annual return to maturity. The company classifies the bond as a held-to- maturity investment. Required Prepare the journal entries to record the investment on January 1, 2022, receipt of the interest payments on December 31 of each year 2022 through 2024, and receipt of the bond principal on December 31, 2024, using the effective interest method. Exercise 1-3 Solution E1.3 Held-to-Maturity Investments Amortization schedule (supports numbers in entries below) Interest Investment Income Balance 6% of the Amortization Beginning Beginning $8,000 - Interest Balance - Date Investment Balance Income Amortizatio n 1/1/2022 105,346 12/312022 6,321 1,679 103,667 12/31/202 3 6,220 1,780 101,887 12/31/202 4 6,113 1,887 100,000 January 1, 2022 Investment in HTM securities 105,346 Cash 105,346 December 31, 2022 Cash 8,000 Interest income 6.321 Investment in HTM securities 1,679 December 31, 2023 Cash 8,000 Interest income 6,220 Investment in HTM securities 1,780 December 31, 2024 Cash 8,000 Interest income 6,113 Investment in HTM securities 1,887 Cash 100,000 Investment in HTM securities 100,000

E1-7 A question Investment in Equity Securities with No Significant Influence Investment in Equity Securities with No Significant Influence Zyggy Corporation invests in the stock of other companies for trading purposes. Zyggy has the following investment activity during 2018, 2019, and 2020:  Purchased stock of Allen Corporation on February 3, 2018, for $200,000. The investment was sold on June 18, 2018, for $210,000.  Purchased stock of Becker Corporation on October 29, 2018, for $400,000. The investment had a fair value of $380,000 on December 31, 2018, and was sold for $405,000 on March 1, 2019.  Purchased stock of Corey Corporation on November 1, 2018, for $600,000. Its fair value on December 31, 2018 and 2019 was $640,000 and $510,000, respectively. The investment was sold for $500,000 on February 15, 2020. Required a. At what amount is Zyggy’s investment in equity securities reported on its December 31, 2018, and 2019 balance sheets? b. What gains and losses are reported on Zyggy’s income statements for 2018, 2019, and 2020? Use a negative sign with answers to indicate a net loss, if applicable. E1.7 Solution Investment in Equity Securities with No Significant Influence a. December 31, 2021 Investment in Becker Corporation $ 380,000 Investment in Corey Corporation 640,000 Total $1,020,000 December 31, 2022 Investment in Corey Corporation $ 510,000 b. 2021 Gain on investment in Allen Corporation= $210,000 - $200,000 = $ 10,000 Loss on investment in Becker Corporation = $380,000 - $400,000 = (20,000) Gain on investment in Corey Corporation = $640,000 - $600,000 = 40,000 Net gain $30,000 2022 Gain on investment in Becker Corporation = $405,000 - $380,000 = $ 25,000 Loss on investment in Corey Corporation = $510,000 - $640,000 = (130,000) Net loss $(105,000) 2023 Loss on investment in Corey Corporation = $500,000 - $510,000 = $ (10,000) E1-9 A Question Equity Method Investment with Intercompany Sales and Profits The Coca-Cola Company owns 28 percent of the voting stock of Coca-Cola FEMSA, acquired at book value. Assume that Coca-Cola FEMSA reports income of $5 million for 2013. Coca-Cola FEMSA regularly sells canned beverages to Coca-Cola at a markup of 35 percent on cost. During 2013 Coca-Cola FEMSA's sales to Coca-Cola totaled $25 million. Coca-Cola's January 1, 2013, inventories include $1,350,000 purchased from Coca-Cola FEMSA. Coca-Cola's December 31, 2013, inventories include $1,215,000 purchased from Coca-Cola FEMSA.

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Prepare the 2013 journal entry on Coca-Cola's books to recognize its income from Coca-Cola FEMSA under the equity method. E1.9 Solution Equity Method Investment with Intercompany Sales Calculation of equity in Coca-Cola FEMSA’s net income: Coca-Cola’s share of Coca-Cola FEMSA’s reported income (28% x $5 million) $ 1,400,000 + Realized profit on intercompany sales [28% x ($1,350,000 – ($1,350,000/1.35))] 98,000 - Unrealized profit on intercompany sales [28% x ($1,215,000 – ($1,215,000/1.35))] (88 ,200) Equity in net income of Coca-Cola FEMSA $ 1 ,409,800 Entry to record equity in Coca-Cola FEMSA’s net income: Investment in Coca-Cola FEMSA 1,409,800 Equity in net income of Coca-Cola FEMSA (income) 1,409,800 EXERCISES E2-1 Question Recording a Merger and a Stock Acquisition The Poonamalie Company paid $6,000,000 in cash to the shareholders of the Slys company for all of Slys' outstanding shares. Attorneys' fees related to the combination were $200,000 paid in cash. A comparison of the book and fair values of Slys' assets and liabilities follows: Book Value Fair Value Cash and receivables $50,000 $50,000 Equity method investments 300,000 400,000 Inventory 700,000 300,000 Plant assets 2,000,000 1,200,000 Current liabilities (350,000) (350,000) Long-term debt (1,800,000) (1,700,000) Net assets $900,000 $100,000 Required a. Prepare the journal entry made by Poonamalie to record the business combination as a merger. E2-1 Solution E2.1 Record a Business Combination Cash and receivables 50,000 Equity method investments 400,000 Inventory 300,000 Plant assets 1,200,000 Goodwill 6,100,000 Merger expenses (income) 200,000 Current liabilities 350,000 Long-term debt 1,700,000

Cash 6,200,000 E2-4 Question VMware, Inc. is a subsidiary of Dell Technologies Inc., providing customers with IT resource management. In fiscal 2020, VMware acquired Avi Networks, Inc., a provider of multi-cloud application delivery services, for $335 million. This price reflected goodwill of $228 million and identifiable intangible assets of $94 million. Assume that VMware paid the acquisition price in cash, and also incurred $10 million in acquisition-related legal and advisory services, paid in cash. Required a. What was the fair value of tangible net assets, if any, that VMware recognized at the date of acquisition? b. Prepare the journal entry to record this business combination. E2.4 Solution Record a Business Combination (in millions) a. Acquisition cost $ 335 Less identifiable intangible assets (94) Less goodwill (228) Tangible net assets acquired $ 13 b. Identifiable intangible assets 94 Goodwill 228 Tangible net assets 13 Merger expenses (income) 10 Cash (1) 345 (1) $335 + $10 = $345 E2-5 Question Bargain Purchase Sontag Corporation’s net assets have fair values as described below. Fair Value Current assets $390,000 Land 921,000 Buildings and equipment 1,500,000 Loans payable (500,000) The Pratt Company pays $4,000,000 for Sontag Corporation, and records the acquisition as a merger. Pratt Company determines that identifiable intangibles valued at $1,900,000, not previously reported on Sontag’s books, also are recognized as acquired assets. Required a. Prepare a schedule to calculate the gain on acquisition. b. Prepare Pratt’s journal entry to record the merger. c. Now assume Pratt determines that Sontag Corporation has unreported contingent liabilities, reportable at the date of acquisition following GAAP, with a fair value of $95,000. Recalculate the gain on acquisition. E2-5 Solution E2.5 Bargain Purchase a.

Price paid $ 4,000,000 Fair value of identifiable net assets: Current assets $ 390,000 Land 921 ,000 Buildings and equipment 1 ,500,000 Identifiable intangibles 1,900,000 Loans payable (500 ,000) 4 ,211,000 Gain on acquisition $ 211 ,000 b. Current assets 390,000 Land 921,000 Buildings and equipment 1,500,000 Identifiable intangibles 1,900,000 Loans payable 500,000 Cash 4,000,000 Gain on acquisition (income) 211,000 c. The addition of $95,000 in contingent liabilities reduces the fair value of identifiable net assets acquired to $4,116,000 (= $4,211,000 – $95,000). Therefore the gain on acquisition is $116,000 (= $4,000,000 – $4,116,000). E2-9 Question Acquisition Cost Potluck Corp. acquired all of the net assets of Sauers Corp. on June 30, 2022, in an acquisition reported as a merger. The fair values of Sauers Corp.’s identifiable net assets at the date of acquisition are as follows: Tangible assets $35,000,000 Intangible assets 80,000,000 Liabilities 65,000,000 Potluck pays $90 million in cash and issues 1,000,000 shares of stock to the former owners of Sauers. Potluck’s stock has a par value of $1/share. The market price of the shares at the date of acquisition, $70/ share, is used to value the shares issued. Registration fees for the stock are $950,000, and legal and consulting fees connected with the acquisition are $800,000, both paid in cash. Required Record the acquisition on June 30, 2022. E2-9 Solution E2.9 Acquisition Cost Tangible assets 35,000,000 Intangible assets 80,000,000 Goodwill 110,000,000 Merger expenses (income) 800,000 Liabilities 65,000,000 Cash 91,750,000 Common stock 1,400,000 Additional paid-in capital 67,650,000 APIC = $70M-$1.4M-.95M = $6,765M Cash = $90M + .8M +.95M = $91.750M Goodwill = price paid-net assets at fair value = $90M + $70M (stock) -$50M = $110M PROBLEMS P2-1 Question A Acquisition Entries, Various Types of Combinations, Acquisition Costs

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Plastic Corporation is contemplating a business combination with Steel Corporation at December 31, 20218. Steel’s condensed balance sheet on that date appears below: Assets Book Value Fair Value Cash and receivables $10,000 $10,000 Inventory 35,000 45,000 Land 26,000 31,000 Buildings and equipment 7,000 14,000 Patents 5,000 10,000 Total assets $83,000 Liabilities and Stockholders' Equity Liabilities $22,000 $22,000 Common stock 25,000 -- Retained earnings 36,000 -- Total liabilities and equity $83,000 Required Prepare the journal entry to record the business combination of Plastic and Steel for each of the following acquisition costs and combination methods. (a) Plastic merges with Steel by acquiring all of Steel’s stock for $250,000 cash, in a merger. Other direct cash acquisition costs are $20,000. ( b) Plastic merges with Steel by acquiring all of Steel’s stock for $85,000 cash, in a merger. Other direct cash acquisition costs are $5,000. (c) Plastic acquires all of Steel’s stock for $275,000 cash, in a stock acquisition. Other direct cash acquisition costs are $15,000. Assume the following fair value of the assets Cash and receivables - $10,000 Inventory - $8,000 Land - $2,000 Building and Equipment - $5,000 Patent – 1,000 Steel liabilities are reported at amounts equal to fair value, and it also has unrecorded liabilities of $20,0000 P2-1 Solution P2.1 Acquisition Entries, Acquisition Costs, Bargain Gain a. Cash and receivables 10,000 Inventory 45,000 Land 31,000 Buildings and equipment 14,000 Patents 10,000 Goodwill 162,000 Merger expenses (income) 20,000 Liabilities 22,000 Cash 270,000 b. Cash and receivables 10,000

Inventory 45,000 Land 31,000 Buildings and equipment 14,000 Patents 10,000 Merger expenses (income) 5,000 Liabilities 22,000 Cash 90,000 Gain on acquisition (income) 3,000 c. Cash and receivables 10,000 Inventory 8,000 Land 2,000 Buildings and equipment 5,000 Patents 1,000 Goodwill 291,000 Merger expenses (income) 15,000 Liabilities 42,000 Cash 290,000 Note: In this case, the fair value of identifiable net assets acquired is negative. This leads to discussion of how this could happen (valuation is from the point of view of the acquirer while book value and impairment is from the point of view of the acquiree), and the impact on goodwill. P2-3 Question Acquisition with Stock Options In May 2019, FireEye, Inc. acquired all of the outstanding shares of privately held Verodin, for $143.682 million in cash and 8,404,609 shares of FireEye common stock with a fair value of $119.7 million and a par value of $0.0001 /share. In addition, FireEye converted Verodin’s unvested stock options to FireEye stock, and included $1,500,000 as part of acquisition consideration. Out-of-pocket acquisition-related costs were $600,000. The following table summarizes the date-of-acquisition fair values of the identifiable net assets acquired. Net tangible assets $15,036,000 Identifiable intangible assets: Developed technology 38,300,000 Customer relationships 4,600,000 Trade names 1,600,000 Contract backlog 700,000 Deferred tax liability (886,000) Fair value of identifiable net assets $59,350,000 Required a. Assume the fair value of total stock options that FireEye assumed was $4,000,000 million. However, only $1,500,000 million was included as part of acquisition cost. Indicate true or false for each of the following statements relating to the criteria for determining the fair value of assumed stock options included as acquisition cost and the proper accounting for the remaining stock option fair value: b. What is the total acquisition cost, and how much goodwill was recognized for this acquisition? c. Prepare the journal entry to record this transaction as a merger. Assume out-of-pocket acquisition related costs were paid in cash, and that total stock option value was $4,o00,000 million. Note: Round all numbers to the nearest thousand. For example, $905 would be $1,000.

d. Assume that you are FireEye’s auditor. Indicate true/false for each of the following statements regarding potential concerns related to how this acquisition was reported: P-3 Solution P2.3 Solution Acquisition with Stock Options a.The fair value of stock options included as part of acquisition cost are those that compensate for services performed prior to the acquisition date. Those stock options add to acquisition cost, increasing goodwill. The stock options issued but not included as part of the acquisition cost do not pertain to pre-acquisition service, and are recorded as prepaid compensation, to be expensed over the future service period to which they apply, since they are compensation for future services. The fair value of all stock options is accumulated in paid-in capital. b. Total acquisition cost is: Cash paid to Verodin shareholders $143,682,000 Fair value of stock issued to Verodin shareholders 119,700,000 Fair value of stock options assumed 1,500,000 Total acquisition cost $264,882,000 Acquisition cost $264,882,000 Less fair value of identifiable net assets acquired (59,350,000) Goodwill $205,532,000 c. Net tangible assets 15,036,000 Developed technology 38,300,000 Customer relationships 4,600,000 Trade name 1,600,000 Contract backlog 700,000 Goodwill 205,532,000 Prepaid compensation expense 2,500 Merger expenses (income) 600,000 Deferred tax liability 886,000 Cash (1) 144,282,000 Common stock (2) 1,000 Paid-in capital (3) 123,699,000 (1) $143,682,000 + $600,000 = $144,282,000 (2) 8,404,609 x $0.0001 = $840, or $1,000 rounded. (3) $119,700,000 + $4,000,000 – $1,000 = $123,699,000 c. Identifiable intangible assets are separately capitalized if they are contractual or separable and are valued at fair value. Determination of the numbers included for the four intangible assets recognized is based on judgment of expected future cash flows and the discount rate (see the FireEye business application in the chapter). In this case, a majority of acquisition cost (78%) is allocated to goodwill, which is not amortized and therefore only affects future income if it is impaired. The auditor should look for missing tangible assets as well as possible understatement of amortizable intangible assets acquired. P2-6 Question Identifiable Intangibles and Goodwill Prince Corporation acquires Squire Service Corporation for one million shares of Prince stock, valued at $35 per share. Squire is merged into Prince, although it continues to do business under the Squire Service name. Professional fees connected with the acquisition are $1,200,000 and costs of registering and issuing the new shares are $600,000, both paid in cash. Squire performs vehicle maintenance services for owners of auto, truck and bus fleets. Squire’s balance sheet at acquisition is as follows:

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Cash $300,000 Current liabilities $3,100,000 Accounts receivable 2,700,000 Long-term liabilities 8,600,000 Parts inventory 5,200,000 Shareholders' equity 14,100,000 Equipment 17,600,000 Total assets $25,800,00 0 Total liabilities and equity $25,800,000 In reviewing Squire’s assets and liabilities, you determine the following: 1. On a discounted present value basis, the accounts receivable have a fair value of $2,600,000, and the long-term liabilities have a fair value of $8,000,000. 2. The current replacement cost of the parts inventory is $6,000,000. 3. The current replacement cost of the equipment is $19,500,000. 4. Squire occupies its service facilities under an operating lease with ten years remaining. The rent is below current market levels, giving the lease an estimated fair value of $1,250,000. 5. Squire has long-term service contracts with several large fleet owners. These contracts have been profitable; the present value of expected profits over the remaining term of the contracts is estimated at $2,000,000. 6. Squire has a skilled and experienced work force. You estimate that the cost to hire and train replacements would be $750,000. 7. Squire’s trade name is well-known among fleet owners and is estimated to have a fair value of $200,000. Instructions: For all numerical answers below, enter answers using all zeros - do not abbreviate answers to in thousands or in millions . Required a. Calculate the amount of goodwill that Prince records for the acquisition. b. Prepare Prince’s journal entry or entries to record the merger with Squire. P2-6 Solution P2.6 Solution Identifiable Intangibles and Goodwill a. Acquisition cost (1,000,000 shares @ $35) $35,000,000 Identifiable net assets acquired: Cash $ 300,000 Accounts receivable 2,600,000 Parts inventory 6,000,000 Equipment 19,500,000 Intangible: Lease 1,250,000 Intangible: Service contracts 2,000,000 Intangible: Trade name 200,000 Current liabilities (3,100,000) Long-term liabilities (8 ,000,000) 20 ,750,000 Goodwill $14 ,250,000 Note: The lease, service contracts, and trade name qualify as identifiable intangibles, as they are based on legal or contractual rights. The work force does not qualify as an identifiable intangible, as it is neither separable nor based on legal/contractual rights. Thus the work force value is included as part of goodwill.

b. Prince’s journal entry to record the merger is as follows: Cash 300,000 Accounts receivable 2,600,000 Parts inventory 6,000,000 Equipment 19,500,000 Intangible: Lease 1,250,000 Intangible: Service contracts 2,000,000 Intangible: Trade name 200,000 Goodwill 14,250,000 Merger expenses (income) 1,200,000 Cash (1) 1,800,000 Current liabilities 3,100,000 Long-term liabilities 8,000,000 Capital stock (2) 34,400,000 Notes: (1) Cash paid for professional fees ($1,200,000) and registration and issue costs ($600,000). (1) Proceeds from stock issue ($35,000,000) less registration and issue costs ($600,000). No par value is specified, so it is not possible to distinguish common stock at par value from additional paid-in capital. P2-11 Question Earnings Contingency, In-Process R&D, Bargain Purchase On January 2, 2021, Fiser, Inc. acquired Vixen Pharmaceuticals for $1.25 billion cash, in a merger. Vixen had two promising products for treating common infections under review by the U.S. Food and Drug Administration. The balance sheets of Fiser and Vixen reflect data immediately prior to the acquisition. Fair value information appears for Vixen’s reported assets and liabilities. Fiser, Inc. Vixen Pharmaceuticals (in thousands) Book Value Book Value Fair Value Current assets $5,000,000 $200,000 $200,000 Property, plant and equipment 60,000,000 10,000,000 5,000,000 Patents 10,000,000 500,000 3,000,000 Total assets $75,000,000 $10,700,00 0 $8,200,000 Liabilities $35,000,000 $7,850,000 $7,850,000 Capital stock 25,000,000 5,000,000 Retained earnings 15,000,000 (2,150,000) Total liabilities and equity $75,000,000 $10,700,00 0 $1 billion of the purchase price was allocated to previously unreported in-process research and development attributed to Vixen’s products under development. The purchase price was low due to Vixen’s poor performance in previous years —Vixen reported a retained earnings deficit of $2.15 billion as of the date of acquisition. To close the deal, Fiser agreed to pay the former owners of Vixen $2 for every dollar of total revenue above $50 million reported on sales of Vixen’s products over the next two years. This payment, if made at all, would occur at December 31, 2022. Fiser expects that there is only a 10 percent chance the payment will be made, as follows: Total expected revenue on Vixen's products, 2018 - 2019 Probability Below $50 million 0.90 $60 million 0.08 $80 million 0.02

(a) Calculate the present value of the earnout agreement, using a 15 percent discount rate (Round your answer to nearest thousand dollars.) (b) This acquisition is a bargain purchase. Calculate the gain on acquisition reported by Fiser.) (c) Prepare the entry Fiser made to record the acquisition (in thousands). (d) Prepare Fiser’s post-combination balance sheet (in thousands). P2.11 Solution Earnings Contingency, In-Process R&D, Bargain Purchase (all dollar amounts in thousands) a. ($60,000 – $50,000) x $2 =$20,000 x .08 = $1,600 ($80,000 – $50,000) x $2 =$60,000 x .02 = 1,200 $2 ,800 $2,800/(1.15) 2 = $2,117 b. Price paid: Cash $1,250,000 Earnout 2,117 Total price $1,252,117 Fair value of reported assets: $8,200,000 Fair value of reported liabilities: (7,850,000) (350,000) Fair value of unreported IPR&D (1,000,000) Gain on acquisition $ 97,883 c. Current assets 200,000 Property, plant and equipment 5,000,000 Patents 3,000,000 In-process R&D 1,000,000 Liabilities (1) 7,852,117 Cash 1,250,000 Gain on acquisition (income) 97,883 (1) Includes contingent consideration liability of $2,117. d. Current assets $ 3,950,000 Liabilities $42,852,117 Property, plant and equipment 65,000,000 Capital stock 25,000,000 Patents 13,000,000 Retained earnings (2) 15,097,883 In-process research & development 1 ,000,000 _________ Total assets $82 ,950,000 Total liabilities and equity $82 ,950,000 (2) $15,000,000 + $97,883 gain = $15,097,883 EXERCISES Exercise 3-2-Question Eliminating Entries, Goodwill

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Polaris Company acquires all of the stock of SSC, Inc. for $85 million in cash. At the date of acquisition, SSC’s current assets had a book value of $40 million, its noncurrent assets had a book value of $90 million, and its liabilities had a book value of $100 million. It is determined that the book values of SSC’s net assets approximate fair value at the date of acquisition. SSC’s shareholders’ equity consists of capital stock of $13 million, retained earnings of $20 million (credit balance), and treasury stock of $3 million. Required Prepare the eliminating entries necessary to consolidate the balance sheet accounts of Polaris and SSC at the date of acquisition. E13-2 Solution E3.1 Eliminating Entries, Goodwill (amounts in millions) (E) Capital stock 13 Retained earnings 20 Treasury stock 3 Investment in SSC 30 To eliminate SSC’s shareholders’ equity accounts and the book value portion of the investment account. (R) Goodwill 55 Investment in SSC 55 To revalue SSC’s net assets to fair value and eliminate the difference between book value and fair value of SSC’s net assets from the investment account. Goodwill = $85 – ($13 + $20 - $3) = $55. Exercise 3-3-Question Eliminating Entries, Previously Unreported Intangibles, Goodwill Pirin Company acquires all of the voting stock of Skoda Automotive for $38 million in cash. Skoda’s balance sheet accounts at the date of acquisition are listed below. (in millions) Dr (Cr) Current assets $2.3 Property, plant and equipment 11.9 Current liabilities (3.0) Long-term liabilities (8.2) Capital stock (1.8) Retained earnings (1.6) Accumulated other comprehensive income 0.4 Total $0.0 Date-of-acquisition book values approximate fair value for all reported assets and liabilities. The following previously unreported intangibles are identified as belonging to Skoda, along with their estimated fair values at the date of acquisition (in millions): Synergies with Pirin technologies $3.0 Order backlogs 2.5

Technical expertise of workforce 9.0 Cost savings on future contracts 4.5 Developed technology 8.0 Required a. Prepare a schedule calculating the goodwill to be recognized for this acquisition. b. Prepare the eliminating entries necessary to consolidate the balance sheet accounts of Pirin and Skoda at the date of acquisition. E13-3 Solution E3.2 Eliminating Entries, Previously Unreported Intangibles, Goodwill (amounts in millions) a. Acquisition cost $ 38.0 Skoda’s book value (3.0) Excess of acquisition cost over book value 35.00 Excess of fair value over book value: Order backlogs $ 2.5 Developed technology 8.0 (10.5) Goodwill $ 24.5 b. (E) Capital stock 1.8 Retained earnings 1.6 AOCI 0.4 Investment in Skoda 3.0 To eliminate Skoda’s shareholders’ equity accounts and the book value portion of the investment account. (R) Order backlogs 2.5 Developed technology 8.0 Goodwill 24.5 Investment in Skoda 35.0 To revalue Skoda’s assets and liabilities to fair value and eliminate the difference between book value and fair value of Skoda’s net assets from the investment account. Exercise 3-4-Question Petrel Corporation acquires all of the stock of Samson Company for $40 million in cash. Samson’s balance sheet accounts at the date of acquisition are listed below. Date-of-acquisition fair values for Samson’s assets and liabilities are also displayed. Samson has previously unreported developed technology valued at $8 million, meeting the criteria for capitalization per ASC Topic 805. (in thousands) Book Value Dr (Cr) Fair Value Dr (Cr) Cash $3,000 $3,000 Accounts receivable 7,000 3,500 Inventories 32,000 17,000 Land, buildings and equipment, net 350,000 120,000

Trademarks 20,000 180,000 Current liabilities (65,000) (65,000) Noncurrent liabilities (260,000) (235,000) Common stock, $2 par (5,000) Additional paid-in capital (88,000) Retained earnings 8,000 Accumulated other comprehensive income (8,000) Treasury stock 6,000 Total $0 Required a. Prepare a schedule calculating the goodwill to be recognized for this acquisition. Instructions : b. Prepare the eliminating entries to consolidate the balance sheets of Petrel and Samson at the date of acquisition. E 13-4 Solution E3.3 Eliminating Entries, Revaluation of Reported Net Assets, Goodwill (amounts in thousands) a. Acquisition cost $ 40,000 Samson’s book value (87,000) Excess of acquisition cost over book value (47,000) Excess of fair value over book value: Accounts receivable $ (3,500) Inventories (15,000) Land, buildings and equipment, net (230,000) Trademarks 160,000 Developed technology 8,000 Noncurrent liabilities 25,000 55,500 Goodwill $ 8,500 Note that even though Petrel pays less than book value for Samson’s stock, Petrel still pays more than the fair value of Samson’s identifiable net assets, and therefore goodwill is recognized. b. (E) Common stock 5,000 Additional paid-in capital 88,000 AOCI 8,000 Retained earnings 8,000 Treasury stock 6,000 Investment in Samson 87,000 To eliminate Samson’s shareholders’ equity accounts and the book value portion of the investment account. (R) Trademarks 160,000 Developed technology 8,000 Noncurrent liabilities 25,000

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Goodwill 8,500 Investment in Samson 47,000 Accounts receivable 3,500 Inventories 15,000 Land, buildings and equipment, net 230,000 To revalue Samson’s assets and liabilities to fair value and eliminate the difference between book value and fair value of Samson’s net assets from the investment account. Note that because the acquisition cost is less than book value, eliminating entry (R) requires a debit to the investment account to eliminate it. Exercise 3-5-Question Eliminating Entries, Bargain Gain Phelps, Inc. acquires all of the stock of Skelton Company for $10 million in cash. At the date of acquisition, Skelton’s current assets had a book value of $6 million and a fair value of $2 million, its noncurrent assets had a book value of $35 million and a fair value of $16 million, and its liabilities had a book value of $12 million, which approximated fair value. Skelton also has previously unreported identifiable intangibles, valued at $13 million, that meet ASC Topic 805’s criteria for recognition. Skelton’s shareholders’ equity consists of capital stock of $31 million and a retained loss of $2 million (debit balance). Required a. Calculate the gain on acquisition and prepare Phelps’ journal entry to record the acquisition on its own books. . b. Prepare the eliminating entries necessary to consolidate the balance sheet accounts of Phelps and Skelton at the date of acquisition. E5-5 Solution E3.5 Eliminating Entries, Bargain Gain (amounts in millions) a. Acquisition cost $ 10 Skelton book value (29) Excess of acquisition cost over book value (19) Excess of fair value over book value: Current assets $ (4) Noncurrent assets (19) Identifiable intangibles 13 10 Bargain gain $ (9) The fair value of Skelton’s identifiable net assets is $19 (= $2 + $16+ $13 – $12). Phelps paid only $10, and records a gain of $9 on acquisition Investment in Skelton (amount paid plus gain) 19 Cash 10 Gain on acquisition 9 To record the bargain gain investment on Phelps’ books. b. (E) Capital stock 31

Retained earnings 2 Investment in Skelton 29 To eliminate Skelton’s shareholders’ equity accounts and the book value portion of the investment account. (R) Identifiable intangibles 13 Investment in Skelton 10 Current assets 4 Noncurrent assets 19 To revalue Skelton’s assets and liabilities to fair value and eliminate the difference between book value and fair value of Samson’s net assets from the investment account. Exercise 3--Question Eliminating Entries with Previously Unreported Intangibles ProLock acquired all of the stock of Senyo for $16,000,000. At the date of acquisition, Senyo’s $9,000,000 of reported net assets were fairly stated, except land was overvalued by $700,000 and unrecorded in-process R&D was valued at $2,500,000. Senyo’s equity accounts were as follows: Capital stock $9,000,000 Retained deficit (1,500,000) Accumulated other comprehensive income 2,000,000 Treasury stock (500,000) Total $9,000,000 Required Prepare the working paper eliminating entries needed to consolidate ProLock and Senyo at the date of acquisition. E13.6 Solution E3.5 Eliminating Entries with Previously Unreported Intangibles Acquisition Cost 16,000 Book value (9,000) Excess 7,000 Land (700) Intagible 2,500 (1,800) Goodwill 5,200 (E) Capital stock 9,000,000 AOCI 2,000,000 Retained deficit 1,500,000 Treasury stock 500,000 Investment in Senyo 9,000,000 To eliminate Senyo’s equity and the book value portion of the investment account. (R) In-process R&D 2,500,000 Goodwill 5,200,000 Land 700,000 Investment in Senyo 7,000,000 To revalue Senyo’s identifiable net assets to fair value, recognize goodwill, and eliminate the remainder of the investment account. Exercise 3-7-Question

Acquisition and Eliminating Entries, Acquisition Expenses Pinnacle Corporation acquired all of Stengl Corporation's common stock by issuing 250,000 shares of $1 par common stock with a current market value of $10,000,000. Related accountants' and attorneys' fees were $300,000, paid in cash. The total book value of Stengl's shareholders' equity consists of capital stock of $200,000 and retained earnings of $1,800,000. Book values and fair values of Stengl's assets and liabilities are given below: Book Value Fair Value Cash and receivables $800,000 $800,000 Inventories 1,100,000 900,000 Plant assets, net 1,600,000 1,000,000 Current liabilities (1,000,000) (1,000,000) Long-term debt (500,000) (475,000) Totals $2,000,000 $1,225,000 In addition, Stengl has previously unrecorded identifiable intangible assets with a fair value of $500,000 that meet ASC 805 criteria for recognition. Required (a) Prepare the entry Pinnacle makes to record the acquisition on its own books. (b) Prepare the working paper eliminating entries to consolidate the balance sheets of Pinnacle Corporation and Stengl Corporation at the date of acquisition. E13-6 Solution E3.7 Acquisition and Eliminating Entries, Acquisition Expenses a. Investment in Stengl 10,000,000 Merger expenses 300,000 Common stock 250,000 Additional paid-in capital 9,750,000 Cash 300,000 b. (E) Capital stock 200,000 Retained earnings 1,800,000 Investment in Stengl 2,000,000 To eliminate Stengl’s equity and the book value portion of the investment account. (R) Long-term debt 25,000 Identifiable intangible assets 500,000 Goodwill 8,275,000 Plant assets, net 600,000 Inventories 200,000 Investment in Stengl 8,000,000 To revalue Stengl’s identifiable net assets to fair value, recognize goodwill, and eliminate the remainder of the investment account. Note: Acquisition costs are expensed separately on Pinnacle’s books and do not affect consolidation eliminating entries. Exercise 3-11-Question Acquisition Entry and Consolidation Working Paper

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Phoenix, Inc. acquired all of the outstanding common stock of Spark Corporation for $ 1,000 million cash plus 32 million shares of Phoenix’s common stock having a market value of $25 per share. Registration fees were $6 million and merger-related consultant and legal fees were $9 million, paid in cash. Immediately prior to the acquisition, the trial balances of the two companies were as follows: Dr (Cr) (in millions) Phoenix Spark Current assets $ 4,000 $300 Plant and equipment, net 12,000 800 Current liabilities (600) (250) Long-term liabilities (9,000) (400) Common stock, $1 par (500) (400) Additional paid-in capital (5,000) (30) Retained earnings (900) (20) Totals $0 $0 A review of the fair values of Spark’s assets indicates that current assets are overvalued by $30 million, plant and equipment is overvalued by $260 million, and previously unreported brand names and trademarks have a fair value of $210 million. Required a. Prepare the entry Phoenix makes to record the acquisition of Spark. b. Prepare a working paper to consolidate the balance sheets of Phoenix and Spark at the date of acquisition. E3-11 Solution Acquisition Entry and Consolidation Working Paper a. Phoenix makes the following entry to record the acquisition (amounts in millions) : Investment in Spark 1,800 Merger expenses 9 Cash 1,015 Common stock 32 Additional paid-in capital (1) 762 (1) [($25 – $1) x 32] – $6 = $762 This entry is reflected in Phoenix’s account balances in the consolidation working paper below. b. Consolidation Working Paper (in millions)

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Accounts Taken From Books Eliminations Phoenix Dr(Cr) Spark Dr(Cr) Dr Cr Consolidated Balances Dr(Cr) Current assets $ 2 ,985 $ 300 30 (R) $ 3,255 Plant and equipment, net 12,000 800 260 (R) 12,540 Investment in Spark 1 ,800 -- 450 (E) - 1,350 (R) Brand names and trademarks -- -- (R) 210 210 Goodwill -- -- (R) 1,430 1,430 Current liabilities (600) (250) (850) Long-term liabilities (9,000) (400) (9,400) Common stock, $1par (532 ) (400) (E) 400 (532) Additional paid-in capital (5 ,762) (30) (E) 30 (5,762) Retained earnings (891 ) (20 ) (E) 20 _______ (891 ) Total $ 0 $ 0 $ 1 ,990 $ 1 ,990 $ 0 Goodwill may be separately calculated as follows: Acquisition cost $1,800 Spark’s book value (450) Excess of acquisition cost over book value $1,350 Excess of fair value over book value: Current assets $ (30) Plant and equipment, net (260) Brand names and trademarks 210 80 Goodwill $1,430 PROBLEMS Problem 3-1-Question Eliminating Entries, Goodwill On February 15, 2010, Pendragon Corporation acquired all of the stock of Sherwood, Inc. for $500 million in cash. Sherwood's shareholders' equity accounts at the date of acquisition were as follows: (in millions) Common stock, par $2 Additional paid-in capital 25 Retained earnings (deficit) (50) Accumulated other comprehensive income (3) Treasury stock (2) Total shareholders' equity (deficit) $(28) The following previously unreported assets of Sherwood were reported in the acquisition (in millions): Customer lists $70 Brand names 150 Assume Sherwood's fixed assets are overstated by $35 million, but the book values of its other assets and liabilities are fairly reported. (a) Calculate the goodwill for this acquisition. (b) Present the working paper eliminating entries necessary to consolidate the balance sheets of Pendragon and Sherwood at the date of acquisition.

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Problem 3-1 Solution P3.1 Eliminating Entries, Goodwill (amounts in millions) a. Acquisition cost $ 500 Book value (deficit) 28 Excess of acquisition cost over book value $ 528 Fair value less book value: Fixed assets, net $ (35) Customer lists 70 Brand names 150 (185 ) Goodwill $ 343 b. (E) Common stock 2 Additional paid-in capital 25 Investment in Sherwood 28 Retained earnings 50 Accumulated other comprehensive loss 3 Treasury stock 2 To eliminate Sherwood’s equity accounts and the book value portion of the investment account. (R) Customer lists 70 Brand names 150 Goodwill 343 Fixed assets, net 35 Investment in Sherwood 528 To revalue Sherwood’s assets and liabilities to fair value and eliminate the remainder of the investment account. Problem 3-2-Question Consolidation Working Paper, Identifiable Intangibles, Goodwill International Technology Inc. (ITI) acquires all of the voting stock of Global Outsourcing Corporation (GOC) on June 30, 2010. Amounts paid are as follows (in millions): Cash consideration to the former shareholders of GOC $50 2,000,000 shares of new $1 par common stock issued 60 Registration fees on new stock issued, paid in cash 3 Outside legal and advisory services, paid in cash 5 Fair value of earnings contingency 2

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The earnings contingency provides for a potential payout to the former shareholders of GOC at the end of the third year following acquisition. The balance sheets of both companies immediately prior to the acquisition are as follows. Fair values of GOC's assets and liabilities at the date of acquisition are also provided. ITI GOC Balance Sheets (in millions) Book Value Book Value Fair Value Current assets $200 $10 $15 Property, plant and equipment, net 500 130 70 Intangible assets 1,300 20 30 Total assets $2,000 $160 Current liabilities $150 $20 $20 Long-term liabilities 1,200 100 103 Common stock, par 20 4 Additional paid-in capital 550 60 Retained earnings 100 (25) Accumulated other comprehensive income (15) 3 Treasury stock (5) (2) Total liabilities and equity $2,000 $160 The intangible assets reported above consist of patents and trademarks. GOC also has the following previously unreported intangible assets that meet ASC Topic 805 requirements for asset recognition: Fair Value Advanced technology $5 Customer lists 25 (a) Prepare the journal entry or entries ITI makes to record the acquisition on its own books (in millions and enter all decimal places). (b) Prepare a working paper to consolidate the balance sheets of ITI and GOC at June 30, 2010. Enter answers in millions and enter all decimal places. Remember to use negative signs with your credit balance answers in the Dr (Cr) columns. Problem 3.2 Solution P3.2 Consolidation Working Paper, Identifiable Intangibles, Goodwill a. (in millions) Investment in GOC 112 Merger expenses 5 Common stock 2 Additional paid-in capital (1) 55 Contingent consideration liability 2 Cash 58 (1) APIC = fair value of shares issued – par value of shares issued – registration fees: $55 = $60 – $2 – $3

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b. Consolidation Working Paper (in millions) Accounts Taken From Books Eliminations ITI Dr (Cr) GOC Dr (Cr) Dr Cr Consolidated Balances Dr (Cr) Current assets $ 142 $ 10 (R) 5 $ 157 Property, plant and equipment, net 500 130 60 (R) 570 Investment in GOC 112 40 (E) -- 72 (R) Identifiable intangible assets 1,300 20 (R) 10 1,360 (R) 5 (R) 25 Goodwill (R) 90 90 Current liabilities (150) (20) (170) Long-term liabilities (1 ,202) (100) 3 (R) (1,305) Common stock, par (22 ) (4) (E) 4 (22) Additional paid-in capital (605) (60) (E) 60 (605) Retained earnings (95 ) 25 25 (E) (95) Accumulated other comprehensive income 15 (3) (E) 3 15 Treasury stock 5 2 _____ 2 (E) 5 Total $ 0 $ 0 $ 202 $ 202 $ 0 Problem 3-4-Question Consolidated Balance Sheet Working Paper, Bargain Purchase On December 31, 2012, Paxon Corporation acquired all of the outstanding common stock of Saxon Company for $1.70 billion cash. The balance sheets of Paxon and Saxon, immediately prior to the combination, are shown below: Balance Sheets (in millions) Paxon Saxon Assets Cash and receivables $2,860 $720 Inventory 1,700 900 Equity method investments -- 300 Land 650 175 Buildings and equipment, net 2,400 600 Total assets 7,610 2,695 Liabilities and Shareholders' Equity Current liabilities 1,500 1,000

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Long-term debt 2,000 400 Common stock, par value 500 100 Additional paid-in capital 1,200 350 Retained earnings 2,410 845 Total liabilities and shareholders' equity $7,610 $2,695 Several of Saxon's assets and liabilities had fair values that were different from their book values. Estimates of the fair values of these items follow: (in millions) Estimated Fair Value Inventory $800 Equity method investments 250 Land 420 Buildings and equipment, net 900 In addition, Saxon had previously unrecorded identifiable assets valued at $110 million. (a) Calculate the gain on acquisition in this bargain purchase. (b) Prepare a working paper to consolidate the balance sheets of Paxon and Saxon at December 31, 2012. (c) Present the consolidated balance sheet, in good form, at the date of acquisition. P3-4 Solution P3.4 Consolidated Balance Sheet Working Paper, Bargain Purchase (amounts in millions) a. Calculation of gain on acquisition: Acquisition cost $ 1,700 Book value (1,295) Excess of acquisition cost over book value $ 405 Excess of fair value over book value: Inventory $ (100) Equity method investments (50) Land 245 Buildings and equipment 300 Identifiable intangibles 110 (505) Gain on acquisition $ (100)

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b. Consolidation Working Paper Accounts Taken From Books Eliminations (in millions) Paxon Dr (Cr) Saxon Dr (Cr) Dr Cr Consolidated Balances Dr (Cr) Cash and receivables $ 1 ,160 $ 720 $ 1,880 Inventory 1,700 900 100 (R) 2,500 Equity method investments -- 300 50 (R) 250 Investment in Saxon 1 ,800 1,295 (E) -- 505 (R) Land 650 175 (R) 245 1,070 Buildings and equipment, net 2,400 600 (R) 300 3,300 Identifiable intangibles -- -- (R) 110 110 Current liabilities (1,500) (1,000) (2,500) Long-term debt (2,000) (400) (2,400) Common stock, par value (500) (100) (E) 100 (500) Additional paid-in capital (1,200) (350) (E) 350 (1,200) Retained earnings (2 ,510) (845 ) (E) 845 ______ (2 ,510) Total $ 0 $ 0 $ 1 ,950 $ 1 ,950 $ 0

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c. Paxon Corporation and Subsidiary Consolidated Balance Sheet (in millions) January 1, 2019 Assets Liabilities Cash and receivables $ 1,880 Current liabilities $ 2,500 Inventory 2,500 Long-term debt 2 ,400 Equity method investments 250 Total liabilities 4 ,900 Land 1,070 Buildings and equipment, net 3,300 Shareholders’ equity Identifiable intangibles 110 Common stock, par value 500 Additional paid-in capital 1,200 Retained earnings 2 ,510 _______ Total equity 4 ,210 Total assets $ 9,110 Total liabilities and equity $ 9 ,110 Problem 3-12-Question Identifiable Intangibles and Goodwill Prince Corporation, a wholesale vehicle distributor, acquires all of the stock of Squire Service Corporation for one million shares of Prince stock, valued at $35 per share. Squire becomes a subsidiary of Prince. Professional fees connected with the acquisition are $1,200,000 and costs of registering and issuing the new shares are $600,000, both paid in cash. The balance sheets of Prince and Squire immediately prior to the acquisition are shown next. Balance Sheets Prince Squire Cash $2,800,000 $300,000 Accounts receivable 6,000,000 2,700,000 Parts inventory -- 5,200,000 Vehicle inventory 15,000,000 -- Equipment, net 40,000,000 17,600,000 Total assets $63,800,00 0 $25,800,000 Current liabilities $5,000,000 $3,100,000 Long-term liabilities 25,000,000 8,600,000 Shareholders' equity 33,800,000 14,100,000 Total liabilities and equity $63,800,00 0 $25,800,000 In reviewing Squire's assets and liabilities, you determine the following: 1. On a discounted present value basis, the accounts receivable have a fair value of $2,600,000, and the long-term liabilities have a fair value of $8,000,000. 2. The current replacement cost of the parts inventory is $6,000,000. 3. The current replacement cost of the equipment is $19,500,000. 4. Squire occupies its service facilities under an operating lease with ten years remaining. The rent is below current market levels, giving the lease an estimated fair value of $1,250,000. 5. Squire has long-term service contracts with several large fleet owners. These contracts have been profitable; the present value of expected profits over the remaining term of the contracts is estimated at $2,000,000. 6. Squire has a skilled and experienced work force. You estimate that the cost to hire and train replacements would be $750,000. 7. Squire's trade name is well-known among fleet owners and is estimated to have a fair value of $200,000. (a) Prepare the acquisition entry and a working paper to consolidate the balance sheets of Prince and Squire as of the date of acquisition (in thousands).

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(b) If the acquisition was a merger, Prince records Squire's assets and liabilities directly on its own books. Prepare Prince's entry to record the merger, and compare Prince's balance sheet immediately after the entry is booked with the consolidated balance sheet in part a (in thousands). P3.12 Solution P3.12 Identifiable Intangibles and Goodwill (see related P2.6) a. Prince makes the following entry to record the acquisition on its own books (in thousands) : Investment in Squire 35,000 Merger expenses 1,200 Capital stock 34,400 Cash 1,800 The account balances for Prince, shown in the working paper below, reflect the above entry. Merger expenses reduce retained earnings, a component of shareholders’ equity. Consolidation Working Paper (in thousands) Accounts Taken From Books Eliminations Prince Dr (Cr) Squire Dr (Cr) Dr Cr Consolidated Balances Dr (Cr) Cash* $ 1,000$ 300 $ 1,300 Accounts receivable 2,700 100 (R) 8,600 Parts inventory -- 5,200 (R) 800 6,000 Vehicle inventory 15 -- 15,000 Equipment, net 40 17,600 (R) 1,900 59,500 Investment in Squire 35 -- 14,100 (E) -- 20,900(R) Intangible: Lease -- -- (R) 1,250 1,250 Intangible: Service contracts -- -- (R) 2,000 2,000 Intangible: Trade name -- -- (R) 200 200 Goodwill -- -- (R)14,250 14,250 Current liabilities (5,000) (3,100) (8,100) Long-term liabilities (25 (8,600) (R) 600 (33,000) Shareholders’ equity** (67 (14 ,100) (E)14 ,100 _______ (67 ,000) Total $ $ 0 $ 35 ,100 $ 35 ,100 $ 0 Prince Trail Balance includes the entries for the acquisition. *$2,800-$1,200-$600 - $1,000 **$33,800+35,000-$600-$(1,200) of expense closed out to Retained Earnings) = $67,000

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b. If Prince records the acquisition as a statutory merger, Prince makes the following entry (in thousands) : Cash 300 Accounts receivable 2,600 Parts inventory 6,000 Equipment, net 19,500 Intangible: Lease 1,250 Intangible: Service contracts 2,000 Intangible: Trade name 200 Goodwill 14,250 Merger expenses 1,200 Cash 1,800 Current liabilities 3,100 Long-term liabilities 8,000 Capital stock 34,400 When the above entry is reflected in Prince’s account balances, Prince’s balance sheet account balances are identical to those shown in the consolidated column of the working paper for a stock acquisition.

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Exam 1

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