Question

On January 1, 2015, Fat Farm Corporation issued $300,000, 10-year bonds(debt) and 75,000 shares of its common stock(equity) for all of the outstanding shares of Cross Colors Incorporated. Each of Fat Farm Corporations shares has a $2.50 par value and a $30 fair value at the time of issuance. Fat Farm Corporation also paid $32,500 to accountants, lawyers and brokers for assistance in the acquisition and another $12,750 in connection with stock issuance costs. At the conclusion of the merger all of Cross Color Incorporated's accounts will transfer to the records of Fat Farm Corporation. Cross Color will be dissolved and will no longer exists as a legal entity.

The fair value equaled the book value for all of Cross Colors Inc's assets and liabilities on the date of acquisition except for the following:

	Book Value	Fair Value
Inventory	$650,000.00	$750,000.00
Trademarks	$0.00	$40,000.00
Patents	$80,000.00	$90,000.00
Buildings	$450,000.00	$475,000.00
Loans Payable	($125,000.00)	($190,000.00)

Both Companies financial statements on January 1, 2015 follow:

	Fat Farm Corporation	Cross Color Incorporated
Cash	$1,750,000.00	$695,000.00
Accounts Receivable	$580,000.00	$225,500.00
Supplies	$125,000.00	$65,000.00
Inventory	$895,000.00	$650,000.00
Patents	$0.00	$80,000.00
Equipment	$625,000.00	$210,000.00
Building	$1,500,000.00	$450,000.00
Total Assets	$5,475,000.00	$2,375,500.00

Accounts Payable	($375,000.00)	($55,000.00)
Loans Payable	($1,200,000.00)	($125,000.00)
Common Stock	($70,000.00)	($20,000.00)
Additional Paid In Capital	($2,150,000.00)	($1,050,000.00)
Retained Earnings	($1,680,000.00)	($1,125,500.00)
Total Liabilities & Owners Equity	($5,475,000.00)	($2,375,500.00)

A.) Prepare the necessary journal entry(s) to account for Fat Farms Corporations dissolution of Cross Color Incorporated so that it is no longer a separate legal entity.

Answer 1

Calculation of Purchase Consideration:

10 year bond debts =   $300,000

Equity Share Capital = $187,500

(75000sharesx2.5)

Securities Premium =   $2,062,500

(75000sharesx27.5)

Total Purchase Consideration = $2,550,000

Journal Entries for in the books of Fat Farms Corporations dissolution of Cross Colour Incorporated

(i)

Business Purchase $2,550,000

To liquidator of Cross Colour $2,550,000

(ii)

Cash $695,000

Accounts Receivable $225,500

Supplies $ 65,000

Inventory $750,000

Patents $ 90,000

Equipment $210,000

Building $475,000

Trademarks $40,000

Good Will(B/f) $244,500

To Accounts Payable $55,000

To Loans Payable $190,000

To Business Purchase $2,550,000

(iii)

Liquidator of Cross Colour $2,550,000

To Equity Share Capital $187,500

To Securities Premium $2,062,500

To 10 Year Bonds $300,000

(iv)

Liqudation Expenses $45,250

To Cash $45,250