On December 31, Pacifica, Inc., acquired 100 percent of the voting stock of Segu
ID: 2334991 • Letter: O
Question
On December 31, Pacifica, Inc., acquired 100 percent of the voting stock of Seguros Company. Pacifica will maintain Seguros as a wholly owned subsidiary with its own legal and accounting identity. The consideration transferred to the owner of Seguros included 56,500 newly issued Pacifica common shares ($20 market value, $5 par value) and an agreement to pay an additional $130,000 cash if Seguros meets certain project completion goals by December 31 of the following year. Pacifica estimates a 50 percent probability that Seguros will be successful in meeting these goals and uses a 4 percent discount rate to represent the time value of money.
Immediately prior to the acquisition, the following data for both firms were available:
In addition, Pacifica assessed a research and development project under way at Seguros to have a fair value of $157,000. Although not yet recorded on its books, Pacifica paid legal fees of $24,600 in connection with the acquisition and $11,700 in stock issue costs.
a. Prepare Pacifica’s entries to account for the consideration transferred to the former owners of Seguros, the direct combination costs, and the stock issue and registration costs.
b.&c. Present a worksheet showing the postacquisition column of accounts for Pacifica and the consolidated balance sheet as of the acquisition date.
Explanation / Answer
a Journal entries To account for the consideration transferred to the former owners of Seguros Investment in Seguros $1,192,500 Common Stock $282,500 APIC $847,500 Contingent performance obligation $62,500 Contingent performance obligation = $130000 x 50% x 0.96154 = $62500 Present value of $1 @ 4% for a period of year 1 = 0.96154 To record direct combination cost Combination Cost $24,600 Cash $24,600 To record stock issue and registration cost APIC $11,700 Cash $11,700 b Postacquisition column of accounts for Pacifica Opening Balance Acquired Adjustments Post acquisition Balance Cash $162,000 $154,000 -$36,300 $279,700 Receivable and inventory $254,000 $73,500 $327,500 Investment in Seguros $1,192,500 $1,192,500 Property, plant and equipment $2,190,000 $662,500 $2,852,500 Trademarks $353,000 $293,000 $646,000 Liabilities -$596,000 -$258,000 -$62,500 -$916,500 Common Stock -$400,000 -$282,500 -$682,500 APIC -$475,000 -$835,800 -$1,310,800 Retained earnings -$1,488,000 -$1,488,000 Combination cost $24,600 $24,600 Research and development project $157,000 $157,000 c Consolidated Balance sheet as of acquisition date Pacifica Seguros Elimination/ adjustments Consolidated Total Cash $125,700 $154,000 $279,700 Receivables and Inventory $254,000 $93,000 -$19,500 $327,500 Investment in Seguros $1,192,500 -$1,192,500 $0 Research and development project $157,000 $157,000 Property, Plant and equipment $2,190,000 $487,000 $175,500 $2,852,500 Trademarks $353,000 $248,000 $45,000 $646,000 Goodwill $110,500 $110,500 Total Assets $4,115,200 $982,000 $4,373,200 Liabilities -$658,500 -$258,000 -$916,500 Common Stock -$682,500 -$200,000 $200,000 -$682,500 APIC -$1,310,800 -$70,000 $70,000 -$1,310,800 Retained Earnings -$1,463,400 -$454,000 $454,000 -$1,463,400 Total Liabilities and equities -$4,115,200 -$982,000 $0 -$4,373,200
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