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For this assignment, use your Fundamentals of Advanced Accounting text and the Excel spreadsheet provided on the companion website (linked in Resources) to complete the following:
● Problem 29 on page 82. This problem tests your knowledge of financial statement reporting for consolidated companies. In the spreadsheet, use tab P02-29 for your answers.
Pratt Company acquired all of Spider, Inc.’s outstanding shares on December 31, 2018, for $495,000 cash. Pratt will operate Spider as a wholly owned subsidiary with a separate legal and accounting identity. Although many of Spider’s book values approximate fair values, several of its accounts have fair values that differ from book values. In addition, Spider has internally developed assets that remain unrecorded on its books. In deriving the acquisition price, Pratt assessed Spider’s fair and book value differences as follows:
Book Values
Fair Values
Computer software
$ 20,000
$ 70,000
Equipment
40,000
30,000
Client contracts
–0–
100,000
In-process research and development
–0–
40,000
Notes payable
(60,000)
(65,000)
At December 31, 2018, the following financial information is available for consolidation:
Pratt
Spider
Cash
$ 36,000
$ 18,000
Receivables
116,000
52,000
Inventory
140,000
90,000
Investment in Spider
495,000
–0–
Computer software
210,000
20,000
Buildings (net)
595,000
130,000
Equipment (net)
308,000
40,000
Client contracts
–0–
–0–
Goodwill
–0–
–0–
Total assets
$ 1,900,000
$ 350,000
Accounts payable
$ (88,000)
$ (25,000)
Notes payable
(510,000)
(60,000)
Common stock
(380,000)
(100,000)
Additional paid-in capital
(170,000)
(25,000)
Retained earnings
(752,000)
(140,000)
Total liabilities and equities
$(1,900,000)
$(350,000)
Prepare a consolidated balance sheet for Pratt and Spider as of December 31, 2018.
___________________________________________________________________________________
Problem 33 on page 84. This problem tests your application of the statutory merger method for business combinations.
On January 1, NewTune Company exchanges 15,000 shares of its common stock for all of the outstanding shares of On-the-Go, Inc. Each of NewTune’s shares has a $4 par value and a $50 fair value. The fair value of the stock exchanged in the acquisition was considered equal to On-the-Go’s fair value. NewTune also paid $25,000 in stock registration and issuance costs in connection with the merger.
Several of On-the-Go’s accounts’ fair values differ from their book values on this date:
Book Values
Fair Values
Receivables
$ 65,000
$ 63,000
Trademarks
95,000
225,000
Record music catalog
60,000
180,000
In-process research and development
–0–
200,000
Notes payable
(50,000)
(45,000)
Precombination book values for the two companies are as follows:
NewTune
On-the-Go
Cash
$ 60,000
$ 29,000
Receivables
150,000
65,000
Trademarks
400,000
95,000
Record music catalog
840,000
60,000
Equipment (net)
320,000
105,000
Totals
$ 1,770,000
$ 354,000
Accounts payable
$ (110,000)
$ (34,000)
page 85
Notes payable
(370,000)
(50,000)
Common stock
(400,000)
(50,000)
Additional paid-in capital
(30,000)
(30,000)
Retained earnings
(860,000)
(190,000)
Totals
$(1,770,000)
$(354,000)
a.
Assume that this combination is a statutory merger so that On-the-Go’s accounts will be transferred to the records of NewTune. On-the-Go will be dissolved and will no longer exist as a legal entity. Prepare a postcombination balance sheet for NewTune as of the acquisition date.
b. Assume that no dissolution takes place in connection with this combination. Rather, both companies retain their separate legal identities. Prepare a worksheet to consolidate the two companies as of the combination date.
c. How do the balance sheet accounts compare across parts (a) and (b)?
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