Question

Petra Corporation purchased all of the outstanding shares of Stuckey Corporation for $24,000,000. Stuckey’s balance sheet at the date of acquisition is as follows:

	Book Value		Fair Value
	Dr (Cr)
Current assets	$    8,000,000		$    6,500,000
Plant assets	90,000,000		60,000,000
Current liabilities	(4,000,000)		(4,000,000)
Noncurrent liabilities	(69,000,000)		(67,000,000)
Capital stock	(2,000,000)
Retained earnings	(23,000,000)

Stuckey has previously unreported intangibles, meeting the criteria for capitalization, with a fair value of 35,000,000. Eliminating entry (R) on the consolidation working paper, is:

a.

a.   

Noncurrent liabilities	2,000,000
Intangible assets	35,000,000
Current assets		1,500,000
Plant assets		30,000,000
Gain on acquisition		5,500,000

b.

b.

Noncurrent liabilities	2,000,000
Intangible assets	35,000,000
Current assets		1,500,000
Plant assets		30,000,000
Investment in Stuckey		2,000,000
Gain on acquisition		3,500,000

c.

c.

Noncurrent liabilities	2,000,000
Intangible assets	35,000,000
Investment in Stuckey	1,000,000
Current assets		1,500,000
Plant assets		30,000,000
Gain on acquisition		6,500,000

d.

d.

Intangible assets	35,000,000
Investment in Stuckey	1,000,000
Current assets		1,500,000
Plant assets		30,000,000
Noncurrent liabilities		2,000,000
Gain on acquisition		2,500,000

Answer 1

Answer : option (c)

c. Noncurrent liabilities 2,000,000 Intangible assets 35,000,000 Investment in Stuckey 1,000,000 Current assets 1,500,000 Plant assets 30,000,000 Gain on acquisition 6,500,000

Explanation :

Elimination (E) removes Stuckey’s equity accounts, crediting the investment by $25,000,000. Elimination (R) eliminates the remainder of theinvestment with a debit of $1,000,000, and revalues the identifiable net assetsfrom book to fair value. The gain on investment is the price paid less the fairvalue of the identifiable net assets acquired, or $24,000,000 – ($6,500,000 +$60,000,000 + $35,000,000 – $4,000,000 – $67,000,000) = $6,500,000