Concept explainers
a.
To prepare:Journal entries that Company B would record for business combination
Introduction:Internal expansion refers to situation in a company forms a subsidiary by transferring some of its assets and liabilities and in exchange of ownership shares. Shares of the subsidiary is either provided to the shareholders in addition to their existing shares (Spin off) or in exchange of their existing shares (split off).
a.
Explanation of Solution
In the books of Company B:
Record of merger expenses:
Date | Account | Debit ($) | Credit($) |
Merger Expense | 135,000 | ||
Cash | 135,000 | ||
(To record direct cost of combination.) |
Table (1)
- Merger Expense is an expense and it is increased by $135,000. Therefore, Merger Expenseaccount is debited with $135,000.
- Cash is an asset and it is decreased by $135,000. Therefore, cashaccount is credited with $135,000.
Record of stock registration and issuing common stock:
Date | Account | Debit ($) | Credit($) |
Deferred stock issue costs | 42,000 | ||
Cash | 42,000 | ||
(To recordcost of stock registration and issuing common stock.) |
Table (2)
- Deferred stock issue cost is equity and it is decreased by $42,000. Therefore, deferred stock account is debited with $42,000.
- Cash is an asset and it is decreased by $42,000. Therefore, cashaccount is credited with $42,000.
Record transfer of assets and liabilities:
Date | Account | Debit ($) | Credit($) |
Cash | 28,000 | ||
251,500 | |||
Inventory | 395,000 | ||
Long term investments | 175,000 | ||
Land | 100,000 | ||
Rolling Stock | 63,000 | ||
Plant and Equipment | 2,500,000 | ||
Patents | 500,000 | ||
Special Licenses | 100,000 | ||
Discount on equipment trust notes | 5,000 | ||
Discount on debentures | 50,000 | ||
109,7001 | |||
Current Payable | 137,200 | ||
Mortgage payable | 500,000 | ||
Premium on Mortgage payable | 20,000 | ||
Equipment Trust Notes | 100,000 | ||
Debentures Payable | 1,000,000 | ||
Common Stock | 180,000 | ||
Additional Paid-in Capital-Common | 2,298,000 | ||
Deferred stock issue cost | 42,000 | ||
(To recordbusiness combination) |
Table (3)
- Cash is an asset and it is increased by $28,000. Therefore, cashaccount is debited with $28,000.
- Accounts Receivable is an asset and it is increased by $251,500. Therefore, Accounts Receivableaccount is debited with $251,500.
- Inventory is an asset and it is increased by $395,000. Therefore, Accounts Inventory accountis debited with $395,000.
- Long term investmentis an asset and it is increased by $175,000. Therefore, Long term investment accountis debited with $175,000.
- Land is an asset and it is increased by $100,000. Therefore, Land accountis debited with $100,000.
- Rolling Stockis an asset and it is increased by $63,000. Therefore, Rolling stockaccountis debited with $63,000.
- Plant and equipment is an asset and it is increased by $2,500,000. Therefore, Plant and equipment accountis debited with $2,500,000.
- Patent is an asset and it is increased by $500,000. Therefore, Patent accountis debited with $500,000.
- Special Licensesis an asset and it is increased by $100,000. Therefore, Special Licensesaccountis debited with $100,000.
- Discount on equipment trust notes is a liability and decreased by $5,000. Therefore, Discount on equipment trust account notes is debited with $5,000.
- Discount on debenture is a liability and decreased by $50,000. Therefore, Discount on debenture account is debited with $50,000.
- Goodwill is an asset and it is increased by $109,700. Therefore, Goodwill accountis debited with $109,700.
- Current Payable is a liability and it is increased by $137,200. Therefore, Current Payableaccount is credited with $137,200.
- Mortgage Payable is a liability and it is increased by $500,000. Therefore, Mortgage Payableaccount is credited with $500,000.
- Premium on Mortgage Payable is a liability and it is increased by $20,000. Therefore, Premium on Mortgage Payableaccount is credited with $20,000.
- Equipment Trust Notes is a liability and decreased by $100,000. Therefore, Equipment Trust Notes account is debited with $100,000.
- Debentures Payable is a liability and decreased by $1,000,000. Therefore, Debentures Payable account is debited with $1,000,000.
- Common Stock is equity and it is increased by $180,000. Therefore, Common Stockaccount is credited with $180,000.
- Additional paid in capital-Commonis equity and it is increased by $2,298,000. Therefore, Additional paid in capital account is credited with $2,298,000.
- Deferred stock issue cost is equity and it is increased by $42,000. Therefore, deferred stock issue cost account is credited with $42,000.
Working Note:
- Calculation of goodwill:
Particulars | Amount ($) | Amount ($) |
Value of stock issued | 2,520,000 | |
Fair value of assets acquired | 4,112,500 | |
Fair value of liabilities assumed | (1,702,200) | |
Fair value of net identifiable assets | (2,410,300) | |
Goodwill | 109,700 |
b.
To prepare:Journal entries that Company H would record for business combination and distribution of stock.
Introduction:Internal expansion refers to situation in a company forms a subsidiary by transferring some of its assets and liabilities and in exchange of ownership shares. Shares of the subsidiary is either provided to the shareholders in addition to their existing shares (Spin off) or in exchange of their existing shares (split off).
b.
Explanation of Solution
Record transfer of assets and liabilities:
Date | Account | Debit ($) | Credit($) |
Investment in Company B | 2,520,000 | ||
Allowance for | 6,500 | ||
Accumulated | 614,000 | ||
Current payables | 137,200 | ||
Mortgage payable | 500,000 | ||
Equipment Trust Notes | 100,000 | ||
Debentures payable | 1,000,000 | ||
Discount on Debentures payable | 40,000 | ||
Cash | 28,000 | ||
Accounts Receivable | 258,000 | ||
Inventory | 381,000 | ||
Long term investments | 150,000 | ||
Land | 55,000 | ||
Rolling Stock | 130,000 | ||
Plant and Equipment | 2,425,00 | ||
Patents | 125,000 | ||
Special Licenses | 95,800 | ||
Gain on sale of assets and liabilities | 1,189,90 | ||
(To record business combination) |
Table (4)
- Investment in Company B is an asset and it is increased by $2,520,000. Therefore, Investment in Company Baccountis debited with $2,520,000.
- Allowance for Bad Debts is liability and it is decreased by $6,500. Therefore, Allowance for Bad Debtsaccountis debited with $6,500.
- Accumulate Depreciationis liability and it is decreased by $614,000. Therefore, Accumulate Depreciation accountis debited with $614,000.
- Current Payable is liability and it is decreased by $137,200. Therefore, Current Payableaccountis debited with $137,200.
- Mortgage Payable is liability and it is decreased by $500,000. Therefore, Mortgage Payable accountis debited with $500,000.
- Equipment Trust Notes is liability and it is decreased by $100,000. Therefore, Equipment Trust Notesaccountis debited with $100,000.
- Debentures Payable is liability and it is decreased by $1,000,000. Therefore, Debentures Payable accountis debited with $1,000,000.
- Discount on Debentures Payable is liability and it is increased by $1,000,000. Therefore, Discount on Debentures Payable accountis credited with $1,000,000.
- Cash is an asset and it is decreased by $28,000. Therefore, Cash account is credited with $28,000.
- Accounts Receivable is an asset and it is decreased by $258,000. Therefore, Accounts Receivableaccount is credited with $258,000.
- Inventory is an asset and it is decreased by $381,000. Therefore, Inventoryaccount is credited with $381,000.
- Long term investment is an asset and it is decreased by $150,000. Therefore, Long term investmentaccountis credited with $150,000.
- Land is an asset and it is decreased by $55,000. Therefore, landaccountis credited with $55,000.
- Rolling Stock is an asset and it is decreased by $130,000. Therefore, Rolling Stockaccountis credited with $130,000.
- Plant and Equipment is an asset and it is decreased by $2,425,000. Therefore, Plant and Equipmentaccountis credited with $2,425,000.
- Patent is an asset and it is decreased by $125,000. Therefore, Patentsaccountis credited with $125,000.
- Special License is an asset and it is decreased by $95,800. Therefore, Special Licensesaccountis credited with $95,800.
- Gain on sale of assets and liabilities is an asset and it is decreased by $1,189,900. Therefore, Gain on sale of assets and liabilitiesaccountis credited with $1,189,900.
Want to see more full solutions like this?
Chapter 1 Solutions
GEN CMB ADV FINCL ACCT; Connect Access Card
- Companies X, Y and Z, parties to a consolidation, have the following data: X Co Y Co Z CoNet assets P400,000 P600,000 P1,000,000Average annual earnings 60,000 60,000 80,000The parties collectively agreed that the new corporation, AA Co will issue a single class of stock based on the earnings ratio. What is the stock distribution ratio to companies X, Y and Z, respectively?arrow_forwardQuestion: A Company own 90% of the outstanding shares of B Company and 80% of the outstanding shares of C Company. The companies sell goods to each other. For the current year, A sold goods to C for P250,000 at a 40% mark-up. C sold 70% of the goods to B for P250,000. B in turn sold 65% of the goods to outside parties for P300,000. 1 . Compute for the consolidated cost of sales. a) 274,120 b) 50,120 c) 59,528 d) 283,528 2 . Compute the consolidated gross profit. a) 149,880 b) 240,472 c) 249,880 d) 140,472arrow_forwardIllustration 1. Share-for-share exchanges On January 1, 2022, Frank Co. and Richard, Inc. combined. As of this date, the fair values of the assets, liabilities and equity of Frank and Richard before the business combination are as follows: On the negotiation for the business combination, the acquirer incurred the following transaction costs: P45,000.00 for legal fees; P 5,000.00 for due diligence cost and P 80,000.00 for the general admin cost and cost of maintaining an internal acquisition department. Case 1: before the transaction, Frank, Co. have 7,000 outstanding shares. Frank Co. Issued additional 10,000 shares as consideration for a 100% interest in Richard. Frank’s shares currently sells P150 per share in the market, while Richard’s shares are quoted at P200 per share. With the stated facts, answer the following: 1.How much is the Share Premium of the combined company after the business combination?a. P 730,000.00b. P 1,230,000.00c. P 800,000.00d. P 1,700,000.002.How much is…arrow_forward
- Pamrod Manufacturing acquired all the assets and liabilities of Stafford Industries on January 1, 20X2, in exchange for 4,100 shares of Pamrod’s $20 par value common stock. Balance sheet data for both companies just before the merger are given as follows: Pamrod Manufacturing Stafford Industries Balance Sheet Items Book Value Fair Value Book Value Fair Value Assets Cash $ 84,000 $ 84,000 $ 30,000 $ 30,000 Accounts Receivable 103,000 103,000 56,000 56,000 Inventory 215,000 376,000 112,000 153,000 Land 59,000 89,000 49,000 26,000 Buildings and Equipment 608,000 542,000 402,000 344,000 Less: Accumulated Depreciation (236,000 ) (141,000 ) Total Assets $ 833,000 $ 1,194,000 $ 508,000 $ 609,000 Liabilities and Equities Accounts Payable $ 66,000…arrow_forwardXENON Company merged into URANIUM Company on July 1, 2021. In exchange for the net assets at fair market value of XENON Company amounting to P696,450, URANIUM, issued 68,000 ordinary shares at P9 par value with a market price of P12 per share. Out-of-pockets of the combination were as follows: Legal fees for the contract of business combination P35,600; Audit fee for SEC registration of stock issue P90,000; Printing costs of stock certificates P14,500; Broker’s fee P23,600; Accountant’s fee for pre-acquisition P80,000; Other indirect cost of acquisition P75,000; General and allocated expenses P43,000; Listing fees in issuing new shares P36,000. XENON will pay an additional cash consideration of P455,000 in the event that URANIUM’s net income will be equal or greater than P950,000 for the period ended December 31, 2021. At acquisition date, there is a high probability of reaching the target net income and the fair value of the additional consideration was determined to be P195,000.…arrow_forwardAssume that both the Parent and Subsidiary adopt 31 December as their financial year-end. Further assume that the transactions were conducted on cash basis. (i) Prepare all the relevant journal entries in the separate financial statements of the respective companies. (ii) Prepare all the relevant consolidation journal entries for the preparation of the consolidated financial statements of the Parent. (b) On 20 December 20x1, a 70%-owned Subsidiary sold a piece of inventory Y which it bought for $300,000 to its Parent for $200,000. As at 31 December 20x1, that piece of inventory was still with the Parent and the net realisable value of the inventory was $250,000 on this date.arrow_forward
- The ABC Company acquired 90% of the outstanding shares of XYZ Company, a foreign subsidiary, on September 10, 2022. The fair value of the assets of XYZ was the same as their carrying amount except for land whose the fair value was $50,000 greater than its carrying amount of $600,000. Consolidated financial statements are prepared at year-end December 31, 2022. The following rates of exchange have been identified: September 10, 2022 $1.62:P1 December 31, 2022 $1.56:P1 Average rate for the year ended December 31, 2022 $1.60:P1 Average rate for the year ended September 10 to December 31, 2022 $1.58:P1 Round off final answers to the nearest peso. How much is the land to be presented in the consolidated financial statements? Group of answer choices P411,392 P401,235 P406,250 P416,667arrow_forwardPrice Company issued 8,740 shares of its $20 par value common stock for the net assets of Sims Company in a business combination under which Sims Company will be merged into Price Company. On the date of the combination, Price Company common stock had a fair value of $30 per share. Balance sheets for Price Company and Sims Company immediately prior to the combination were: Price Sims Current assets $460,540 $61,810 Plant and equipment (net) 529,190 140,940 Total $989,730 $202,750 Liabilities $274,100 $53,300 Common stock, $20 par value 558,200 88,000 Other contributed capital 72,870 20,750 Retained earnings 84,560 40,700 Total $989,730 $202,750 (a) If the business combination is treated as a purchase and Sims Company’s net assets have a fair value of $209,574, Price Company’s balance sheet immediately after the combination will include goodwill of…arrow_forwardIf Alakdan Co., a new company would acquire the net assets of Cardo and Allana Company by issuing 50,000 shares of P25 par value ordinary shares with fair value of P130 per share and paying professional finders fee and stock registration costs of P125,000 and P65,000, respectively, determine:i. The total amount of Goodwill to be reported by Alakdan Co.ii. The total assets of Alakdan Co. after the business combination.iii. The total stockholders equity of Aklan Co after the business combination.iv. The journal entries to be made by Alakdan Co. for the business combination.arrow_forward
- Business Combination - Accounting for an acquirer) On 1 July 2020, B Ltd acquired all the assets and liabilities of P Ltd. In exchange for these assets and liabilities, Brad Ltd issued 100,000 shares that at date of issue had a fair value of $4.50 per share. Costs of issuing these shares amounted to $2,000. Legal costs associated with the acquisition of Pitt Ltd amounted to $3,200. The asset and liabilities of P Ltd at 1 July 2020 were as follows (Extract): Assets Carrying Amount Fair Value Cash $ 3 000 - Account Receivable 12 000 $ 12 000 Inventories 63 000 69 000 Plant and equipment 330 000 225 000 Accumulated Depreciation – plant and Equipment (100 000) - Land 200 000 280 000 Liabilities Accounts payable 22 000 22 000 Debentures 68 000 68 000 Required: prepare the journal entries in the records of B Ltd at 1 July 2020.arrow_forwardBusiness Combination - Accounting for an acquirer) On 1 July 2020, B Ltd acquired all the assets and liabilities of P Ltd. In exchange for these assets and liabilities, Brad Ltd issued 100,000 shares that at date of issue had a fair value of $4.50 per share. Costs of issuing these shares amounted to $2,000. Legal costs associated with the acquisition of Pitt Ltd amounted to $3,200. The asset and liabilities of P Ltd at 1 July 2020 were as follows (Extract): Assets Carrying Amount Fair Value Cash $ 3 000 - Account Receivable 12 000 $ 12 000 Inventories 63 000 69 000 Plant and equipment 330 000 225 000 Accumulated Depreciation – plant and Equipment (100 000) - Land 200 000 280 000 Liabilities Accounts payable 22 000 22 000 Debentures 68 000 68 000 Required: a) Prepare the acquisition analysis at 1 July 2020 for the acquisition of P Ltd by B Ltd. Assume…arrow_forwardPar Company acquires 100% of the common stock of Sub Company for an agreedupon price of $900,000. The book value of the net assets is $700,000, which includes $50,000 of subsidiary cash equivalents. Existing fixed assets have fair values greater than their recorded book values. How will this transaction affect the cash flow statement of the consolidated firm in the period of the purchase, if:a. Par Company pays $900,000 cash to purchase the stock?b. Par Company pays $500,000 cash and signs 5-year notes for $400,000? All Sub Company shareholders receive notes.c. Par Company exchanges only common stock with the shareholders of Sub Company?arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningFinancial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning