Question

Lucky’s Company acquires Waterview, Inc., by issuing 40,000 shares of $1 par common stock with a market price of $25 per share on the acquisition date and paying $125,000 cash. The assets and liabilities on Waterview’s balance sheet were valued at fair values except equipment that was undervalued by $300,000. There was also an unrecorded patent valued at $40,000, as well as an unrecorded trademark valued at $75,000. In addition, the agreement provided for additional consideration, valued at $60,000, if certain earnings targets were met.

The pre-acquisition balance sheets for the two companies at acquisition date are presented below.

	Lucky’s Company	Waterview, Inc.
Cash	$300,000	$260,000
Accounts receivable	250,000	135,000
Inventory	254,000	275,000
Property, plant, and equipment	2,300,000	356,500
	$3,104,000	$1,026,500
Accounts payable	$45,000	$37,500
Salaries and taxes payable	450,000	46,000
Notes payable	500,000	450,000
Common stock	250,000	60,000
Additional paid-in capital	950,000	106,500
Retained earnings	909,000	326,500
	$3,104,000	$1,026,500

6.         At what amount is the investment recorded on Lucky’s books?

a. $1,000,000

b. $1,100,000

c. $1,125,000

d. $1,185,000

7.         Compute consolidated property, plant & equipment.

a. $2,600,000

b. $2,656,500

c. $2,956,500

d. $3,071,500

8. What is consolidated retained earnings?

a. $   582,500

b. $   909,000

c. $1,235,500

d. $2,195,500

The following two questions are based on the following set of facts.

On January 1, 2021, Consolidated Company purchased 100% of the common stock Avergy Industries for $720,000. On that date, Avergy had common stock of $100,000 and retained earnings of $420,000. Equipment and land were each undervalued by $50,000 on Avergy’s books. There was a $40,000 overvaluation of Bonds Payable, as well a $60,000 undervaluation of inventory.

9.        What is the amount of goodwill recorded in connection with this combination?

a. $0

b. $ 50,000

c. $ 80,000

d. $200,000

10.        The consolidation entries necessary for a date of acquisition balance sheet include all of the following, except:

a. Land debit, $50,000

b. Inventory debit, $60,000

c. Bonds Payable credit, $40,000

d. Equipment debit, $50,000

Answer 1

Part 6

Option C

a. $1,125,000

investment = (40000*25)+125000 = 1125000

Part 7

Option C

c. $2,956,500

consolidated property, plant & equipment = parent’s book value + subsidiary’s book value + undervaluation = 2300000+356500+300000 = $2956500

Part 8

Option B

b. $   909,000

consolidated retained earnings = parent’s book value = 909000

Part 9

Option B

b. $ 50,000

amount of goodwill = purchase price paid – book value – undervaluation of equipment and land – overvaluation of bonds payable – undervaluation of inventory = 720000-(100000+420000)-50000-40000-60000= 50000

Part 10

Option C

c. Bonds Payable credit, $40,000

overpayment of bonds payable should be debited to reduce the amount of bonds payable of subsidiary’s company.