Holmes acquires 100% of watson in a transaction structured as an acquisition at

Question

Holmes acquires 100% of watson in a transaction structured as an acquisition at January 1, 2010 for a payment as follows: Payment to Watson shareholders of $6 million cash, notes payable of $4 million due in 3 years at a market interest rate, and 100,000 shares of Holmes common stock with a $5 par and a $20 fair value. a. Under the acquisition method, how much is debited to Holmes Investment Account at 5. January 1, 2010 Under the purchase method, how much is debited to Holmes Investment Account at January 1, 2010 Under both methods how much is the consolidated Investment in Watson. b. c.

Explanation / Answer

a. Acquisition Method

Amount Debited to Holmes Investment Account = Cash +Note Payable + Fair Value of Stock

Amount Debited to Holmes Investment Account = 6000000 + 4000000 + 100000 * $20

Amount Debited to Holmes Investment Account = $12000000

b. Purchase Method

Amount Debited to Holmes Investment Account = Cash +Note Payable + Par Value of Stock

Amount Debited to Holmes Investment Account = 6000000 + 4000000 + 100000 * $5

Amount Debited to Holmes Investment Account = $10500000

c. Consolidated Investment (It won't changes and it will be same as Method Investment account balance)

Consolidated Investment in Acquisition Method = $12000000

Consolidated Investment in Purchase Method = $10500000

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