On December 31, Pacifica, Inc., acquired 100 percent of the voting stock of Segu
ID: 2569005 • 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 53,635 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 $127,000. Although not yet recorded on its books, Pacifica paid legal fees of $18,700 in connection with the acquisition and $9,800 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.
Pacifica Seguros Book Values Seguros Fair Values Revenues $ (1,620,000 ) Expenses 1,134,000 Net income $ (486,000 ) Retained earnings, 1/1 $ (993,000 ) Net income (486,000 ) Dividends declared 99,000 Retained earnings, 12/31 $ (1,380,000 ) Cash $ 164,000 $ 125,000 $ 125,000 Receivables and inventory 397,000 182,000 162,400 Property, plant, and equipment 1,860,000 459,000 612,500 Trademarks 373,000 189,000 229,800 Total assets $ 2,794,000 $ 955,000 Liabilities $ (539,000 ) $ (226,000 ) $ (226,000 ) Common stock (400,000 ) (200,000 ) Additional paid-in capital (475,000 ) (70,000 ) Retained earnings (1,380,000 ) (459,000 ) Total liabilities and equities $ (2,794,000 ) $ (955,000 )Explanation / Answer
Answer a. Journal entries to record the acquisition on Pacifica’s records.
Investment in Seguros 1,062,500
Common Stock (50,000 × $5) 250,000
Additional Paid-In Capital (50,000 × $15) 750,000
Contingent Performance Obligation 62,500
The contingent consideration is computed as:
$130,000 payment × 50% probability × 0.961538 present value factor
Professional Services Expense 15,000
Cash 15,000
Additional Paid-In Capital 9,000
Cash 9,000
Answer b. and c.
Pacifica
Seguros
Consolidation Entries
Consolidated Balance Sheet
Revenues
(1,200,000)
(1,200,000)
Expenses
890,000
890,000
Net income
(310,000)
(310,000)
Retained earnings, 1/1
(950,000)
(950,000)
Net income
(310,000)
(310,000)
Dividends declared
90,000
90,000
Retained earnings, 12/31
(1,170,000)
(1,170,000)
Cash
86,000
85,000
171,000
Receivables and inventory
750,000
190,000
(A) 10,000
930,000
Property, plant and equipment
1,400,000
450,000
(A)150,000
2,000,000
Investment in Seguros
1,062,500
(S) 705,000
0
(A) 357,500
Research and development asset
(A)100,000
100,000
Goodwill
(A) 77,500
77,500
Trademarks
300,000
160,000
(A) 40,000
500,000
Total assets
3,598,500
885,000
3,778,500
Liabilities
(500,000)
(180,000)
(680,000)
Contingent performance obligation
(62,500)
(62,500)
Common stock
(650,000)
(200,000)
(S) 200,000
(650,000)
Additional paid-in capital
(1,216,000)
(70,000)
(S) 70,000
(1,216,000)
Retained earnings
(1,170,000)
(435,000)
(S) 435,000
(1,170,000)
Total liabilities and equities
(3,598,500)
(885,000)
1,072,500
1,072,500
(3,778,500)
Pacifica
Seguros
Consolidation Entries
Consolidated Balance Sheet
Revenues
(1,200,000)
(1,200,000)
Expenses
890,000
890,000
Net income
(310,000)
(310,000)
Retained earnings, 1/1
(950,000)
(950,000)
Net income
(310,000)
(310,000)
Dividends declared
90,000
90,000
Retained earnings, 12/31
(1,170,000)
(1,170,000)
Cash
86,000
85,000
171,000
Receivables and inventory
750,000
190,000
(A) 10,000
930,000
Property, plant and equipment
1,400,000
450,000
(A)150,000
2,000,000
Investment in Seguros
1,062,500
(S) 705,000
0
(A) 357,500
Research and development asset
(A)100,000
100,000
Goodwill
(A) 77,500
77,500
Trademarks
300,000
160,000
(A) 40,000
500,000
Total assets
3,598,500
885,000
3,778,500
Liabilities
(500,000)
(180,000)
(680,000)
Contingent performance obligation
(62,500)
(62,500)
Common stock
(650,000)
(200,000)
(S) 200,000
(650,000)
Additional paid-in capital
(1,216,000)
(70,000)
(S) 70,000
(1,216,000)
Retained earnings
(1,170,000)
(435,000)
(S) 435,000
(1,170,000)
Total liabilities and equities
(3,598,500)
(885,000)
1,072,500
1,072,500
(3,778,500)
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