Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries, deferred tax liability) Assume that the parent company acquires its subsidiary in a "nontaxable" transaction by exchanging 60,000 shares of its $2 par value Common Stock, with a fair value on the acquisition date of $10 per share, for all of the outstanding voting shares of the investee. In its analysis of the investee company, the fair value of each of the subsidiary's assets and liabilities equals their respective book values except for property, plant and equipment (PPE) assets that are undervalued by $40,000, an unrecorded Customer List with a fair value of $64,000, and an unrecorded Brand Name asset valued at $96,000. And, finally, assume that the tax bases of the subsidiary's pre-acquisition identifiable net assets equal their book values. The parent company's effective tax rate is 22%. a. Prepare the journal entry that the parent makes to record the acquisition. General Journal Description Debit Credit Equity investment 0 0 Common stock ÷ 0 0 APIC 0 0 b. Given the following acquisition-date balance sheets for the parent and its subsidiary, prepare the consolidation spreadsheet. Balance Sheet Assets Cash Accounts receivable Inventory Equity investment Parent Subsidiary $80,000 $32,000 120,000 280,000 48,000 240,000 600,000 Dr Elimination Entries Cr Consolidated $ 0 0 0 0 [E] 0

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Transcribed Image Text:Consolidation at date of acquisition (purchase price greater than book value, acquisition journal entries, deferred tax liability) Assume that the parent company acquires its subsidiary in a "nontaxable" transaction by exchanging 60,000 shares of its $2 par value Common Stock, with a fair value on the acquisition date of $10 per share, for all of the outstanding voting shares of the investee. In its analysis of the investee company, the fair value of each of the subsidiary's assets and liabilities equals their respective book values except for property, plant and equipment (PPE) assets that are undervalued by $40,000, an unrecorded Customer List with a fair value of $64,000, and an unrecorded Brand Name asset valued at $96,000. And, finally, assume that the tax bases of the subsidiary's pre-acquisition identifiable net assets equal their book values. The parent company's effective tax rate is 22%. a. Prepare the journal entry that the parent makes to record the acquisition. General Journal Description Debit Credit Equity investment 0 0 Common stock ÷ 0 0 APIC 0 0 b. Given the following acquisition-date balance sheets for the parent and its subsidiary, prepare the consolidation spreadsheet. Balance Sheet Assets Cash Accounts receivable Inventory Equity investment Parent Subsidiary $80,000 $32,000 120,000 280,000 48,000 240,000 600,000 Dr Elimination Entries Cr Consolidated $ 0 0 0 0 [E] 0

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