Question

The Chan Corporation purchased the net assets (existing liabilities were assumed) of the Tonta Company for $900,000 cash. The balance sheet for the Tonta Company on the date of acquisition showed the following:

Assets
Current assets	$100,000
Equipment	300,000
Accumulated depreciation	(100,000)
Plant	600,000
Accumulated depreciation	(250,000)
Total	$650,000
Liabilities and Equity
Bonds payable, 8%	$200,000
Common stock, $1 par	100,000
Paid-in capital in excess of par	200,000
Retained earnings	150,000
Total	$650,000

Required:

The equipment has a fair value of $300,000, and the plant assets have a fair value of $500,000. Assume that the Chan Corporation has an effective tax rate of 40%. Prepare the entry to record the purchase of the Tonta Company for each of the following separate cases with specific added information:

a.	The sale is a nontaxable exchange to the seller that limits the buyer to depreciation and amortization on only book value for tax purposes.
b.	The bonds have a current fair value of $190,000. The transaction is a taxable exchange.
c.	There are $100,000 of prior-year losses that can be used to claim a tax refund. The transaction is a taxable exchange.
d.	There are $150,000 of past losses that can be carried forward to future years to offset taxes that will be due. The transaction is a nontaxable exchange.

2. The following are preliminary financial statements for Black Co. and Blue Co. for the year ending December 31, 2018, prior to Black’s acquisition of Blue Co.

	Black Co.	Blue Co.
Sales	$360,000	$228,000
Expenses	(240,000)	(132,000)
Net income	$120,000	$ 96,000
Retained earning, January 1, 2018	$480,000	$252,000
Net income (from above)	120,000	96,000
Dividends paid	(36,000)	-0-
Retained earnings, December 31, 2018	$564,000	$348,000
Current assets	$360,000	$120,000
Land	120,000	108,000
Building (net)	480,000	336,000
Total assets	$960,000	$564,000
Liabilities	$108,000	$132,000
Common stock	192,000	72,000
Additional Paid-In Capital	96,000	12,000
Retained earnings, December 31, 2018	564,000	348,000
Total liabilities and stockholders’ equity	$960,000	$564,000

On December 31, 2018 (subsequent to the preceding statements), Black exchanged 10,000 shares of its $10 par value common stock for all of the outstanding shares of Blue. Black's stock on that date has a fair value of $50 per share. Black was willing to issue 10,000 shares of stock because Blue's land was appraised at $204,000. Black also paid $14,000 to attorneys and accountants who assisted in creating this combination.

Required:

Assuming that these two companies retained their separate legal identities, prepare a financial statements consolidation as of December 31, 2018.

Answer 1

1.

a. The sale is a nontaxable exchange to the seller that limits the buyer to depreciation and amortization on only book value for tax purposes.

Answer:

General Journal	Debit	Credit
Current Assets	100,000
Equipment	300,000
Plant	500,000
Goodwill	300,000
Deferred Tax Liability		100,000
Bonds Payable		200,000
Cash		900,000
To record the purchase of the Tonta Company and depreciation & amortization is on book value for tax purpose

Calculation:

	Book Value
Equipment	300,000
Less: Accumulated depreciation	(100,000)
Plant	600,000
Less: Accumulated depreciation	(250,000)
Total Book Value	550,000

	Fair value
Equipment	300,000
Plant	500,000
Total Fair Value	800,000

Deferred Tax Liability = Effective tax rate * Fair Value - Book Value of fixed assets

= 40% * 800,000 - 550,000 = 40% * 250,000 = 100,000

So, Goodwill = (Deferred Tax Liability + Bonds Payable + Cash) - (Current Assets + Equipment + Plant) = (100,000 + 900,000+200,000) - (100,000+300,000+500,000) = 300,000

b. The bonds have a current fair value of $190,000. The transaction is a taxable exchange.

Answer:

General Journal	Debit	Credit
Current Assets	100,000
Equipment	300,000
Plant	500,000
Goodwill	190,000
Bonds Payable		190,000
Cash		900,000
To record the purchase of the Tonta Company and the bond value is of fairvalue 190,000

Calculation:

Bonds Payable = reduced to 190,000.

So, Goodwill = (Bonds Payable + Cash) - (Current Assets + Equipment + Plant) = (900,000+190,000) - (100,000+300,000+500,000) = 190,000

c. There are $100,000 of prior-year losses that can be used to claim a tax refund. The transaction is a taxable exchange

Answer:

General Journal	Debit	Credit
Current Assets	100,000
Equipment	300,000
Plant	500,000
Tax Refund Receivable	40,000
Goodwill	160,000
Bonds Payable		200,000
Cash		900,000
To record the purchase of the Tonta Company and the PY loss could be claimed for tax refund

Calculation:

Tax Refund Receivable = $100,000 * 40% = 40,000

So, Goodwill = (Bonds Payable + Cash) - (Tax Refund Receivable  + Current Assets + Equipment + Plant) = (200,000 + 900,000) - (40,000 + 100,000 + 300,000 + 500,000) = 160,000

d. There are $150,000 of past losses that can be carried forward to future years to offset taxes that will be due. The transaction is a nontaxable exchange.

Answer:

General Journal	Debit	Credit
Current Assets	100,000
Equipment	300,000
Plant	500,000
Deferred Tax Asset	60,000
Goodwill	140,000
Bonds Payable		200,000
Cash		900,000
To record the purchase of the Tonta Company and PY loss can be carried forward to offset tax

Calculation:

Deferred Tax Asset = $150,000 * 40% = 60,000

So, Goodwill = (Bonds Payable + Cash) - (Deferred Tax Asset   + Current Assets + Equipment + Plant) = (200,000 + 900,000) - (60,000+ 100,000 + 300,000 + 500,000) = 140,000

2.

Answer

Please scroll right to see whole table

Bargain Purchase Acquisition Consolidation Worksheet

	Black Company	Blue Company		Consolidation Entries			Consolidated Balance
AccountCr				Dr.	Cr	.
Income Statement
Sales	(360,000)						(360,000)
Expenses	254,000						254,000
Bagain Purchase Gain	(28,000)						(28,000)
Net Income	(134,000)						(134,000)
Statement of Retained Earnings
Retained Earnings - Beginning Balance	(480,000)						(480,000)
Net Income	(134,000)						(134,000)
Dividends	36,000						36,000
Retained Earnings - Ending Balance	(578,000)						(578,000)
Balance Sheet
Current Assets	346,000	120,000					466,000
Investment in Blue Co.	528,000				432,000	[S]
					96,000	[A]	-
Land	120,000	108,000	[A]	96,000			324,000
Buildings	480,000	336,000					816,000
Total Assets	1,474,000	564,000					1,606,000
Liabilities	(108,000)	(132,000)					(240,000)
Common Stock	(292,000)	(72,000)	[S]	72,000			(292,000)
Additional Paid in Capital	(496,000)	(12,000)	[S]	12,000			(496,000)
Retained Earnings - Ending Balance	(578,000)	(348,000)	[S]	348,000			(578,000)
Total Liabilities and Shareholders Equity	(1,474,000)	(564,000)					(1,606,000)

Calculation

Book Value of Blue = Common stock + Additional Paid-In Capital + Retained earnings = 72,000+12,000+348,000 = 432,000

Goodwill Calculation.

Consideration Transferred from Black	500,000
Book Value of Blue [Entry S]	(432,000)
Excess of Fairvalue over Book Value	68,000
Allocation:
Less: Land [Note] [Entry A]	96,000
Bargain Purchase	(28,000)

Note : Allocation Land= 204000-108,000 (Liabilities) = 96,000

Journal Entry:

Entry to record the acqusition on Blacks Books

Professional Fee Expense	14,000
Investment in Blue	528,000
Common Stock - Black		100,000
Additional Paid in Capital - Black		400,000
Cash		14,000
Gain on Bargain Purchase		28,000
To record the acqusition on Blacks books

Common stock =  10,000 shares * $10 = 100,000

Additional Paid in Capital = FV of $50 per share *10000 shares = 500,000-100,000(common stock) = 400,0000

Cash = 14,000 paid to attorney

Investment in Blue = Common Stock + Additional Paid in Capital + Cash + Gain on Bargain Purchase - Professional Fee Expense = 100,000 + 400,000 + 14,000 + 28,000 - 14,000 = 528,000

Entry S:

Common Stock	72,000
Additional Paid in Capital	12,000
Retained Earnings - 12/31/18	348,000
Investment in Blue		432,000
To eliminate Blue Co's shareholders equity and book value of net assets from Black's investment

Entry A:

Land	96,000
Investment in Blue		96,000
To eliminate Balck Co's excess payment over book value from investment and reasssignment