Question

The Chan Corporation purchased the net assets (existing liabilities were assumed) of the Tonta Company for...

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.

Homework Answers

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
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