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 | ||
Accounts Receivable | 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 | ||
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
Advanced Financial Accounting
- Pab Corporation decided to establish Sollon Company as a wholly owned subsidiary by transferring some of its existing assets and liabilities to the new entity. In exchange, Sollon issued Pab 35,000 shares of $7 par value common stock. The following information is provided on the assets and accounts payable transferred: Cost Book Value Fair Value Cash $ 32,000 $ 32,000 $ 32,000 Inventory 83,000 83,000 83,000 Land 69,000 69,000 99,000 Buildings 188,000 147,000 249,000 Equipment 95,000 74,000 123,000 Accounts Payable 58,000 58,000 58,000 Required: Prepare the journal entry that Pab recorded for the transfer of assets and accounts payable to Sollon Prepare the journal entry that Sollon recorded for the receipt of assets and accounts payable from Pab.arrow_forwardSky Ltd acquired all the issued shares of Jupiter Ltd on 1 January 2019. The following transactions occurred between the two entities: • On 1 June 2020, Sky Ltd sold inventory to Jupiter Ltd for $12 000; By 30 June 2020, Jupiter Ltd had sold 20% of this inventory to other entities for $3000. The other 80% was all sold to external entities by 30 June 2021 for $13 000. • During the 2020–21 period, Jupiter Ltd sold inventory to Sky Ltd for $6000 at cost plus 20% markup. Of this inventory, 20% remained on hand in Sky Ltd at 30 June 2021. The tax rate is 30%. Required: a) Prepare the consolidation worksheet entries for Sky Ltd at 30 June 2021 concerning the intragroup inventory transfers. b) Compute the cost of goods sold to be reported in the consolidated income statement for 2021 relating to this intra-group sale. Please avoid solutions in an image based thankuarrow_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
- Use the following to answer questions 8 through 10: On May 1, 2021, Jazzie Co. agreed to sell the assets of its Mister Division to Shawna Inc. for $80 million. The sale was completed on December 31, 2021. Jazzie’s year ends on December 31st. The following additional facts pertain to the transaction: The Mister Division qualifies as a component of an entity as defined by GAAP. Mister's net assets totaled $48 million on Jazzie's books at the time of the sale. Mister incurred a pre-tax operating loss of $10 million in 2021. Jazzie’s income tax rate is 40%. In the 2021 income statement for Jazzie Co., they would report after tax income from discontinued operations of: Group of answer choices $9.2 million. $13.2 million. $22 million. $26 million.arrow_forwardParent Company acquired Sub Company on February 6, 2022. The following out of pocket costs of the combination are as follows:Legal fees for business combination contract- P174,700Audit fees for SEC registration of share issue- 198,400Printing cost of stock certificates- 144,900Broker's fee- 135,000Accountant's fee for pre-acquisition audit- 161,000Other direct cost of acquisition- 90,400General and allocated expenses- 115,300Stock exchange listing fees in issuing shares- 172,000What is the amount of expense to be recognized in the Statement of Comprehensive Income for the year 2022? A. 1,046,800 B. 676,400 C. 874,800 D. 848,400arrow_forwardChoose the correct. Aceton Corporation owns 80 percent of the outstanding stock of Voctax, Inc. During the current year, Voctax made $140,000 in sales to Aceton. How does this transfer affect the consolidated statement of cash flows?a. The transaction should be included if payment has been made.b. Only 80 percent of the transfers should be included because the subsidiary made the sales.c. Because the transfers were from a subsidiary organization, the cash flows are reported as investing activities.d. Because of the intra-entity nature of the transfers, the amount is not reported in the consolidated cash flow statement.arrow_forward
- Pab Corporation decided to establish Sollon Company as a wholly owned subsidiary by transferring some of its existing assets and liabilities to the new entity. In exchange, Sollon issued Pab 34,000 shares of $6 par value common stock. The following Information is provided on the assets and accounts payable transferred: Cash Inventory Land Buildings Equipment Accounts Payable Required: Cost $ 30,000 84,000 Book Value $ 30,000 Fair Value $ 30,000 84,000 84,000 71,000 71,000 101,000 175,000 141,000 242,000 98,000 71,000 114,000 59,000 59,000 59,000 a. Prepare the journal entry that Pab recorded for the transfer of assets and accounts payable to Sollon b. Prepare the journal entry that Sollon recorded for the receipt of assets and accounts payable from Pab. Complete this question by entering your answers in the tabs below. Required A Required B Prepare the journal entry that Pab recorded for the transfer of assets and accounts payable to Sollon. Note: If no entry is required for a…arrow_forwardPat Company acquired Sub Company on February 6, 2022. The following out of pocket costs of the combination are as follows:Legal fees for business combination contract- P174,700Audit fees for SEC registration of share issue- 198,400Printing cost of stock certificates- 144,900Broker's fee- 135,000Accountant's fee for pre-acquisition audit- 161,000Other direct cost of acquisition- 90,400General and allocated expenses- 115,300Stock exchange listing fees in issuing shares- 172,000What is the amount of expense to be recognized in the Statement of Comprehensive Income for the year 2022? 676,400 848,400 1,046,800 874,800arrow_forwardIn a split - off transaction, if the subsidiary's book value is $150 million, and the parent company decides to distribute 80% of the subsidiary's book value to the shareholders of the new entity, how much will a shareholder holding 100 shares in the new entity receive in cash? Assume that the company has 1.25 million shares outstanding.arrow_forward
- Purple Ltd has recently undertaken a business combination with Yellow Ltd. At the start of negotiations, Purple Ltd owned 30% of the shares of Yellow Ltd. The current discussions between the two entities concerned Purple Ltd’s acquisition of the remaining 70% of shares of Yellow Ltd. The negotiations began on 1 January 2022 and enough shareholders in Yellow Ltd agreed to the deal by 30 September 2022. The purchase agreement was for shareholders in Yellow Ltd to receive in exchange shares in Purple Ltd. Over the negotiation period, the share price of Purple Ltd shares reached a low of $5.40 and a high of $6.20. The accountant for Purple Ltd, Mr Nashville, knows that AASB 3 has to be applied in accounting for business combinations. However, he is confused as to how to account for the original 30% investment in Yellow Ltd, what share price to use to account for the issue of Purple Ltd’s shares, and how the varying dates such as the date of exchange and acquisition date will affect the…arrow_forwardSky Ltd acquired all the issued shares of Jupiter Ltd on 1 January 2019. The following transactions occurred between the two entities: • On 1 June 2020, Sky Ltd sold inventory to Jupiter Ltd for $12 000; By 30 June 2020, Jupiter Ltd had sold 20% of this inventory to other entities for $3000. The other 80% was all sold to external entities by 30 June 2021 for $13 000. . During the 2020-21 period, Jupiter Ltd sold inventory to Sky Ltd for $6000 at cost plus 20% markup. Of this inventory, 20% remained on hand in Sky Ltd at 30 June 2021. The tax rate is 30%. Required: Prepare the consolidation worksheet entries for Sky Ltd at 30 June 2021 concerning the intragroup inventory transfers.arrow_forwardEarsplitting Music Inc. has acquired 60% of Raucous Sound, while Deafening Systems Corp. has purchased the remaining 40% of the company. The term joint venture applies even though two companies are purchasing another existing company. True Falsearrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education