Question

Following are preacquisition financial balances for Padre Company and Sol Company as of December 31. Also included are fair values for Sol Company accounts.

	Padre Company					Sol Company
	Book Values					Book Values					Fair Values
	12/31					12/31					12/31
Cash		$	400,000				$	120,000				$	120,000
Receivables			220,000					300,000					300,000
Inventory			410,000					210,000					260,000
Land			600,000					130,000					110,000
Building and equipment (net)			600,000					270,000					330,000
Franchise agreements			220,000					190,000					220,000
Accounts payable			(300,000)					(120,000)					(120,000)
Accrued expenses			(90,000)					(30,000)					(30,000)
Longterm liabilities			(900,000)					(510,000)					(510,000)
Common stock—$20 par value			(660,000)
Common stock—$5 par value								(210,000)
Additional paid–in capital			(70,000)					(90,000)
Retained earnings, 1/1			(390,000)					(240,000)
Revenues			(960,000)					(330,000)
Expenses			920,000					310,000

Note: Parentheses indicate a credit balance.

On December 31, Padre acquires Sol’s outstanding stock by paying $360,000 in cash and issuing 10,000 shares of its own common stock with a fair value of $40 per share. Padre paid legal and accounting fees of $20,000 as well as $5,000 in stock issuance costs.

Determine the value that would be shown in Padre’s consolidated financial statements for each of the accounts listed. (Input all amounts as positive values.)

Answer 1

Workings
Cash Account		Amount($)
Opening Balance		400,000
Less:
Acquisition of Sol's stock		360,000	cash issued
Legal and accounting fees		20,000	cash paid
Stock issuance cost		5,000	cash paid
Closing Balance		15,000
Add : cash balance of Sol		120,000	for consolidation
Consolidated Closing balance		135,000
Net Assets acquired
Share capital		300,000
Revaluation surplus		120,000	difference between book value and fair value of Sol's assets
Opening retained earnings		240,000	Pre acquisition profit is treated as capital profit and is adjusted to the net assets acquired
		660,000
Goodwill Calculation
Cash paid for acquisition		360,000
Stock Issued		400,000	( 10,000 x $40)
Total consideration transferred		760,000
Less
Net Assets acquired		660,000	as per workings above
Goodwill on consolidation		100,000
Statement of Income
			Notes		Dec 31
					Amount($)
Revenue					1,290,000
Cost of sales					-
Gross profit					1,290,000
Other income					-
Operating expenses
Expenses					1,230,000
Legal and accounting cost					20,000
Stock issuance cost					5,000
					1,255,000
Profit / (Loss) before interest & tax					35,000
Finance costs					-
Profit / (Loss) before tax					35,000
Income tax expense					-
Profit / (Loss) for the year					35,000
Statement of financial position
			Notes		Dec 31
					Amount($)
ASSETS
Non-current assets
Property, plant & equipment					1,640,000	line by line addition of parent and subsidiary
Intangibles (Franchise agreements)					440,000	line by line addition of parent and subsidiary
Goodwill( on consolidation)					100,000	as per workings above
		(i)			2,180,000
Current assets
Inventories					670,000	line by line addition of parent and subsidiary
Trade and other receivables					520,000	line by line addition of parent and subsidiary
Cash and cash equivalents					135,000	as per workings above
		(ii)			1,325,000
Total assets		(i) + (ii)			3,505,000
EQUITY & LIABILITIES
Equity
Share capital
Common stock—$20 par value					660,000
Common stock—$40 par value					400,000	New stock issued
Additional paid in capital					70,000
Retained earnings					425,000	retained earning in the TB plus $35,000 profit from the P&L
		(i)			1,555,000
Non-current liabilities
Longterm liabilities					1,410,000	line by line addition of parent and subsidiary
		(ii)			1,410,000
Current liabilities
Accounts payable					420,000	line by line addition of parent and subsidiary
Accrued expenses					120,000	line by line addition of parent and subsidiary
		(iii)			540,000
Total liabilities		(iv) - (ii) + (iii)			1,950,000
Total equity & liabilities		v - (i) + (iv)			3,505,000
Please note that on account of the absence of previous year information, statement of cash flow could not be prepared.					-