Paco Company acquired 100 percent of the stock of Garland Corp. on December 31,

Question

Paco Company acquired 100 percent of the stock of Garland Corp. on December 31, 20X8. The stockholder's equity section of Garland's balance sheet at that date is as follows: Common Stock Additional Paid-In Capital Retained Earnings Total $300,000 500,000 $1,200,000 Paco financed the acquisition by using $880,000 casha approximated fair value for all of Garland's assets and liabilities except for buildings which had a fair value of $60,000 more than its book value and a remaining useful life of 10 years. Any remaining differential was related to goodwill. Paco has an account payable to Garland in the amount of $30,000. Required: 1) Present all consolidating entries needed to prepare a consolidated balance sheet immediately following the acquisition. (no optional entry required)

Explanation / Answer

Note :

Since it is given that book value of net assets of Garland approximated its fair value except for building , thus it means the incremental investment value over book value of Garland ie $80,000 ($1,280,000 - $1,200,000 ) is on account of building acquired whose fair value is $60,000. Thus Goodwill value = $80,000 - $60,000 = $20,000

Consolidating Journal Entries

Note : For better understanding, entries (1) & (2) are separately passed , alternatively we can also record a combine entry instead of two seperate entries

SL Account Titles and Explanation Debit ($) Credit ($) (1) Common Stock 300,000 Additional Paid in Capital 500,000 Retained Earnings 400,000 Investment in Garland Corp 1,200,000 (2) Building 60,000 Goodwill 20,000 Investment in Garland Corp 80,000 (3) Accounts Payable 30,000 Accounts Receivable 30,000

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