Palm company aquired 100per of storm companys voting stock on Jan 120xx.by issui

Question

Palm company aquired 100per of storm companys voting stock on Jan 120xx.by issuing 10,000 shares of its 10 par value common sotck (fv of 14 per share). as of that date storm had STOCKHOLDERS EQUITY TOTALING 105000. Land shown on record was undervalued by 10,000. Equipment (WITH 5YR REMAIN LIFE) was undervalued by 5000. A secret formula developed by storm was appraised at 20,000 with a estimated 20yr life. computation of good will(if any)

Fair value of consideration (10000 * 14) = ?

Book value of S comp. = ?

Allocated to land = ?

Allocated to equipment = ?

Allocated to secret formula =?

Good will = ?

Accounts Palm Co. Storm Co. Income Statement Revenues (485,000) (190,000) Cost of goods sold 160,000 70,000 Depreciation expense 130,000 52,000 Amortization expense Equity in subsidiary earnings (66,000)     Net Income (261,000) (68,000) Statement of Retained Earnings Retained earnings 1/1 (659,000) (98,000) Net income (above) (261,000) (68,000) Dividends paid 175,500 40,000     Retained earnings 12/31 (744,500) (126,000) Balance Sheet Current assets 268,000 75,000 Investment in Storm Co. 216,000 Land 427,500 58,000 Buildings and equipment (net) 713,000 161,000 Formula     Total assets 1,624,500 294,000 Current liabilities (110,000) (19,000) Long-term liabilities (80,000) (84,000) Common stock (600,000) (60,000) Additional paid-in capital (90,000) (5,000) Retained earnings 12/31 (744,500) (126,000)     Total Liabilities and Equity (1,624,500) (294,000) Parentheses indicate a credit     balance

Explanation / Answer

1. Fair value of Consideration= Number of shares issued * Fair value of share on that date

=10,000*14=1,40,000

2. Book value of Storm Co.=1,05,000 (as given in ques on the date of acquisation)

3.Goodwill= It is the positive difference between fair value and book value

=1,40,000( computed from point no.1 above) - 1,05,000( computed from point no. 2 above)

=35,000

4.Value of Land in books of storm=58,000( given in balance sheet) but since it is given in ques that it is undervalued by 10,000, so we have to bring the value of land at it correct value, which comes out to be 58,000-10,000= 48,000..

since land is non-depreciable asset, its value will not be charged to income statement.

5.Allocated to equipment= value of equipment in balance sheet is 1,61,000 but since it is given that it is undervalued by 5,000, its correct value comes to be 1,61,000-5,000=1,56,000..

moreover remaining life of land is 5years, so depreciation amout will be 1,56,000/5years =31,200

6.Allocated to secret formaula=Amount of 20,000 was expended on secret formula which have a life of 20years as per the company. Since secret formula comes under the heading of Intangible assets and as per the norms stated by law, maximum life in which Inangible asset can be written off or allocated to income statement is 15years.

So amount of formula which is to be allocated to income statement comes to be 20,000/15years=1,333.33

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