Accounting - Excerise 2-2

Solutions Guide: Please reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as is EXERCISE 2-2 Acquisition Method The balance sheets of Petrello Company and Sanchez Company as of January 1, 2011, are presented below. On that date, after an extended period of negotiation, the two companies agreed to merge. To effect the merger, Petrello Company is to exchange its unissued common stock for all the outstanding shares of Sanchez Company in the ratio of ? share of Petrello for each share of Sanchez.

Market values of the shares were agreed on as Petrello, $48; Sanchez, $24.

The fair values of Sanchez Company’s assets and liabilities are equal to their book values with the exception of plant and equipment, which has an estimated fair value of $720,000. Petrello Sanchez Cash $ 480,000 $ 200,000 Receivables 480,000 240,000 Inventories 2,000,000 240,000 Plant and equipment (net) 3,840,000 800,000 Total assets $6,800,000 $1,480,000 Liabilities $1,200,000 $ 320,000 Common stock, $16 par value 3,440,000 800,000 Other contributed capital 400,000 —0— Retained earnings 1,760,000 360,000 Total equities $6,800,000 $1,480,000 Prepare a balance sheet for Petrello Company immediately after the merger.

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Cash$680,000 Receivables720,000 Inventories2,240,000 Plant and Equipment (net) ($3,840,000 + $720,000)4,560,000 Goodwill 120,000 Total Assets$8,320,000 Liabilities1,520,000 Common Stock, $16 par ($3,440,000 + (. 50 ? $800,000))3,840,000 Other Contributed Capital ($400,000 + $800,000)1,200,000 Retained Earnings 1,760,000 Total Equities$8,320,000 Entries on Petrello Company’s books would be: Cash200,000 Receivables240,000 Inventory240,000 Plant and Equipment720,000 Goodwill *120,000 Liabilities320,000 Common Stock (25,000 ? $16)400,000 Other Contributed Capital ($48 - $16) ? 25,000800,000 * ($48 ? 5,000) – [($1,480,000 – ($800,000 – $720,000) – $320,000] = $1,200,000 – [$1,480,000 – $80,000 – $320,000] = $1,200,000 – $1,080,000 = $120,000 EXERCISE 2-9 Allocation of Purchase Price to Various Assets and Liabilities Company S has no long-term marketable securities. Assume the following scenarios: Case A Assume that P Company paid $130,000 cash for 100% of the net assets of S Company.

S Company Assets Current Assets Long-lived Assets Liabilities Net Assets Book Value $15,000 $85,000 $20,000 $80,000 Fair Value 20,000 130,000 30,000 120,000 Case B Assume that P Company paid $110,000 cash for 100% of the net assets of S Company.

S Company Assets Current Assets Long-lived Assets Liabilities Net Assets Book Value $15,000 $85,000 $20,000 $80,000 Fair Value 30,000 80,000 20,000 90,000 Case C Assume that P Company paid $15,000 cash for 100% of the net assets of S Company. S Company Assets Current Assets Long-lived Assets Liabilities Net Assets Book Value $15,000 $85,000 $20,000 $80,000 Fair Value 20,000 40,000 40,000 20,000 Complete the following schedule by listing the amount that would be recorded on P’s books.

Assets Retained Earnings Goodwill Current Assets Long-lived Assets Liabilities (Gain in Income Statement) Case A Case B Case C Case A Cost (Purchase Price)$130,000 Less: Fair Value of Net Assets 120,000 Goodwill $ 10,000 Case B Cost (Purchase Price)$110,000 Less: Fair Value of Net Assets 90,000 Goodwill $ 20,000 Case C Cost (Purchase Price)$15,000 Less: Fair Value of Net Assets 20,000 Gain($ 5,000) AssetsLiabilitiesRetained Earnings (Gain) GoodwillCurrent AssetsLong-Lived Assets Case A$10,000$20,000$130,000$30,0000 Case B20,00030,00080,00020,0000

Case C020,00040,00040,0005,000 PROBLEM 2-1 Consolidation Condensed balance sheets for Phillips Company and Solina Company on January 1, 2010, are as follows: Phillips Solina Current assets $180,000 $ 85,000 Plant and equipment (net) 450,000 140,000 Total assets $630,000 $225,000 Total liabilities $ 95,000 $ 35,000 Common stock, $10 par value 350,000 160,000 Other contributed capital 125,000 53,000 Retained earnings (deficit) 60,000 (23,000) Total liabilities and equities $630,000 $225,000 On January 1, 2010, the stockholders of Phillips and Solina agreed to a consolidation.

Because FASB requires that one party be recognized as the acquirer and the other as the acquiree, it was agreed that Phillips was acquiring Solina. Phillips agreed to issue 20,000 shares of its $10 par stock to acquire all the net assets of Solina at a time when the fair value of Phillips’ common stock was $15 per share. On the date of consolidation, the fair values of Solina’s current assets and liabilities were equal to their book values.

The fair value of plant and equipment was, however, $150,000. Phillips will incur $20,000 of direct acquisition costs and $6,000 in stock issue costs. Prepare the journal entries on the books of Phillips to record the acquisition of Solina Company’s net assets. Current Assets 85,000 Plant and Equipment 150,000 Goodwill*100,000 Liabilities 35,000 Common Stock [(20,000 shares @ $10/share)]200,000

Other Contributed Capital [(20,000??? ($15 – $10))]100,000 Acquisition Costs Expense20,000 Cash20,000 Other Contributed Capital6,000 Cash6,000 To record the direct acquisition costs and stock issue costs * Goodwill = Excess of Consideration of $335,000 (stock valued at $300,000 plus debt assumed of $35,000) over Fair Value of Identifiable Assets of $235,000 (total assets of $225,000 plus PPE fair value adjustment of $10,000)