Problem 2-1 (LO 3, 4, 5, 6) 100% purchase, goodwill, consolidated balance sheet.

Question

Problem 2-1 (LO 3, 4, 5, 6) 100% purchase, goodwill, consolidated balance sheet. On July 1, 2016, Roland Company exchanged 18,000 of its $45 fair value ($1 par value) shares for all the outstanding shares of Downes Company. Roland paid acquisition costs of $40,000. The two companies had the following balance sheets on July 1, 2016: Assets Roland Downes Other current assets Inventory $ 50,000 120,000 100,000 300,000 430,000 $1,000,000 $ 70,000 60,000 40,000 120,000 110,000 $400,000 .. Building (net) Equipment (net) Liabilities and Equity $ 180,000 40,000 360,000 420,000 $1,000,000 $ 60,000 20,000 180,000 140,000 $400,000 Common stock ($1 par) Paid-in capital in excess of par . Total liabilities and equity . The following fair values applied to Downes's assets: Land Building.. quipment. 70,000 80,000 90,000 150,000 100,000 . 1. Record the investment in Downes Company and any other entry necessitated by the purchase. 2. Prepare the value analysis and the determination and distribution of excess schedule. 3. Prepare a consolidated balance sheet for July 1, 2016, immediately subsequent to the purchase.

Explanation / Answer

Problem 2-1 1. Journal entry for Investment in Downes company Investment in Downes company $810,000 Common stock $18,000 Additional paid in capital $792,000 2. Value analysis Company Implied value Parent price Company fair value $810,000 $810,000 Fair value of the net assets excluding goodwill $430,000 $430,000 Goodwill $380,000 $380,000 Determination and distribution schedule Company Implied value Parent price Company fair value $810,000 $810,000 Less: book value of interest acquired Common stock $20,000 Paid in capital in excess of par $180,000 Retained Earnings $140,000 Total stockholders equity $340,000 Interest acquired 100% Book value $340,000 Excess fair value over book value $470,000 $470,000 Adjustment of identifiable accounts: Inventory $20,000 Land $50,000 Building $30,000 Equipment ($10,000) Goodwill $380,000 3. Consolidated balance sheet for July 1, 2016, immediately subsequent to the purchase Assets Roland Downes Adjustment Consolidated Other Current assets $50,000 $70,000 $120,000 Inventory $120,000 $60,000 $20,000 $200,000 Land $100,000 $40,000 $50,000 $190,000 Investment in Downes $810,000 ($810,000) $0 Building (net) $300,000 $120,000 $30,000 $450,000 Equipment $430,000 $110,000 ($10,000) $530,000 Goodwill $380,000 $380,000 Total Assets $1,810,000 $400,000 ($340,000) $1,870,000 Liabilities and Equity Current liabilities $180,000 $60,000 $240,000 Common stock $58,000 $20,000 ($20,000) $58,000 Paid in capital in excess of par $1,152,000 $180,000 ($180,000) $1,152,000 Retained earnings $420,000 $140,000 ($140,000) $420,000 Total liabilities and Equity $1,810,000 $400,000 ($340,000) $1,870,000

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