LO3 Consolidation at date of acquisition (purchase price greater than book value

Question

LO3 Consolidation at date of acquisition (purchase price greater than book value) Assume that the parent company acquires its subsidiary by exchanging 103,000 shares of its Common Stock, with a fair value on the acquisition date of $26 per share, for all of the outstanding voting shares of the investee. In its analysis of the investee company, the parent values all of the subsidiary's assets and liabilities at an amount equaling their book values except for an unrecorded Patent owned by the subsidiary with a fair value of $290,000. Any further discrepancy between the purchase price and the 46.

Explanation / Answer

Hey there !!

Let us first start by calculating the Fair value if Investments in date of acquisition of subsidiary compnay.

Now let us prepare consolidated balance sheet :

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Fair Value of Subsidiary on date of Acquisition A. Assets Acquired Cash                      339,000 Accounts Receivable                      522,000 Inventory                      670,500 Property, Plant, Equipment                  1,240,500 Patents                      290,000 Accounts payable                    -190,500 Accrued Liabilities                    -331,500 Fair V of Subsi on DOA                  2,540,000 B. Amount paid on Acquisition      = 103,000 * 26$                  2,678,000 C. Goodwill on Acquisition = 2678000 - 2540000 ( B-A )                      138,000

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