Question

QUESTION 24

1. This question mainly relates to accounting as of the date of acquisition.

   Gamma buys 100% of Beta on January 1, Year 1, for $50 million in cash. At that date, Beta’s books show $10 million in common stock, and $33 million in retained earnings. All of its assets and liabilities have book values equal to fair values, except for land that has $3 million book value but fair value of $6 million. Beta is not dissolved. Give the consolidation entry or entries that would be needed as of the date of consolidation. (5 points)

2. ssume the facts are slightly different in Part A. Assume that, as part of the acquisition, Gamma also promises to pay an extra amount to the shareholders of Beta based on the amount of Beta’s Year 1 and Year 2 income. This payment could be zero, if Beta does poorly, or some other amount, up to $4 million, contingent on how well Beta does. A valuation expert says the fair value of this contingent consideration as of the acquisition date was $2 million. What would be different, if anything, about the entries needed on the date of consolidation? (3 points)

3. Using the same facts as in Part B, assume that at the end of Year 2, Beta has done well enough that Gamma must make a $3.5 million payment to the Beta shareholders. What would an entry look like when Gamma makes the $3.5 million payment? (2 points)

Answer 1

Net worth= Common stock + Retained Earnings

=10+33

=$43

Purchase Consideration=$50

Excess=purchase consieration-net worth

=$50-$43

=$7

Now we will consider revaluation of Land

so it is $3

Goodwill=$7-$3

=$4

Date	Particular	Debit ($)	Credit ()
	Common stock	10
	Retained earnings	33
	Land	3
	Goodwill	4
	Cash		50

Date	Particular	Debit ($)	Credit ($)
	Contingent consideration	2
	Income		2

Date	Particulars	Debit ($)	Credit ($)
	Contingent consideration	2
	Loss	1.5
	Cash		3.5