Chapter 1, Problem 1.35P

a.

To determine

Introduction: Journal entries are a systematic method of recording transactions as and when they occur. It is a summary of transactions divided into the debit and credit items that are recorded chronologically. It is an act of keeping and recording all the transactions occurring in the business.

The journal entries to record the acquisition in P’s books.

Explanation of Solution

Journal Entries

S.no	Date	Particulars	Debit	Credit
1		Cash	$ 30,000
		Accounts receivable	$ 60,000
		Inventory	$ 160,000
		Land	$ 30,000
		Buildings and equipment	$ 350,000
		Bond discount	$ 5,000
		Goodwill	$ 125,000
		Accounts payable		$ 10,000
		Bonds payable		$ 150,000
		Common stock		$ 80,000
		Additional paid in capital		$ 520,000
		(To record the acquisition of S’s net assets)

Calculation of Goodwill
Particulars	Amounts
Cash	$ 30,000
Accounts receivable	$ 60,000
Inventory	$ 160,000
Land	$ 30,000
Buildings and equipment	$ 350,000
Bond discount	$ 5,000
(a)	$ 635,000
Accounts payable	$ 10,000
Bonds payable	$ 150,000
Common stock	$ 80,000
Additional paid in capital	$ 520,000
(b)	$ 760,000
Goodwill (b)-(a)	$125,000

Calculation of Additional paid in capital
Particulars	Price	No. of shares	Amounts
Market price of P's shares	$150	4,000	$600,000
Shares given to S at par	$20	4,000	$80,000
Additional paid in capital	$120	4,000	$520,000

1. Cash, accounts receivable and inventory are the current assets and when the value of the assets increases, the increment in their value shall be debited. Land, building, and equipment are fixed assets and when assets increase the same shall be debited.
2. Discount on bonds and goodwill is a liability and when liabilities decrease, they are debited.
3. Accounts payable and bonds payable are liabilities and an increase in liabilities are credited.
4. Common stock and additional paid-in capital is stakeholder’s equity and when stakeholder’s equity increase, it is credited.
5. Excess amount paid over total assets and total liabilities acquired is called goodwill.
6. Additional paid-in capital arises when a share is given less than the market price.

b.

To determine

Introduction:A consolidated balance sheet is a combination of two or more balance sheets. In the consolidated balance sheet, the assets and liabilities of all its subsidiary companies are included in the assets and liabilities of a parent company.

A consolidated balance sheet after business combination.

Answer to Problem 1.35P

The total assets for the financial year 20X2 immediately after acquisition is $1,525,000

The total liabilities for the financial year 20X2 immediately after acquisition is $1,525,000

Explanation of Solution

Consolidated Balance Sheet

Assets	Amount	Amount
Cash		$ 100,000
Accounts receivable		$ 160,000
Inventory		$ 360,000
Land		$ 80,000
Buildings and equipment	$ 950,000
Less: accumulated depreciation	$ (250,000)	$ 700,000
Goodwill		$ 125,000
Total assets		$ 1,525,000
Liabilities
Accounts payable		$ 60,000
Bonds payable	$ 450,000
Less: discounts	$ (5,000)	$ 445,000
Common stock		$ 280,000
Retained earnings		$ 180,000
Additional paid in capital		$ 560,000
Total liabilities and stockholder’s equity		$ 1,525,000