Problem 2-27 (LO 2-4, 2-5, 2-7, 2-8) Pratt Company acquired all of Spider, Inc.’

Question

Problem 2-27 (LO 2-4, 2-5, 2-7, 2-8)

Pratt Company acquired all of Spider, Inc.’s outstanding shares on December 31, 2015, for $531,550 cash. Pratt will operate Spider as a wholly owned subsidiary with a separate legal and accounting identity. Although many of Spider’s book values approximate fair values, several of its accounts have fair values that differ from book values. In addition, Spider has internally developed assets that remain unrecorded on its books. In deriving the acquisition price, Pratt assessed Spider’s fair and book value differences as follows:

Pratt Company acquired all of Spider, Inc.’s outstanding shares on December 31, 2015, for $531,550 cash. Pratt will operate Spider as a wholly owned subsidiary with a separate legal and accounting identity. Although many of Spider’s book values approximate fair values, several of its accounts have fair values that differ from book values. In addition, Spider has internally developed assets that remain unrecorded on its books. In deriving the acquisition price, Pratt assessed Spider’s fair and book value differences as follows:

Explanation / Answer

Solution:

Calculation of Purchase price and account allocation:

Statement of Consolidation Worksheet at December 31, 2015

Consolidation Balance Sheet as on December 31, 2015:

Consideration transferred at fair value 531,550 Book value 309,000 Excess fair over book value 222,550 Allocation of excess fair value to specific assets and liabilities: to computer software 59,250 to equipment -15,000 to client contracts 109,000 to IPR&D 39,000 to notes payable -9,700 182,550 Goodwill 40,000

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