Problem 2: Buyer pays $5 million to acquire 100% of the common stock in Seller.

Question

Problem 2: Buyer pays $5 million to acquire 100% of the common stock in Seller. Seller has cash of $2,000,000, a patent it developed worth $200,000 (which is not on the balance sheet), PP&E; with a historical cost of $500,000 and a fair value of $600,000 and debt with a fair value and historical cost of $400,000. It has a common stock account of $100,000, APIC of $400,000 and the remainder of its equity is in retained earnings. Seller is maintained as a separate entity after the acquisition; Buyer uses the equity method. a. What is the AAP? b. How much of the AAP is identifiable, and in what accounts will it reside? c. What is the amount of goodwill? d. Give the journal entry for Buyer for the transaction (purchase of Seller). e. What entry does Seller make on the date of acquisition? f. If Seller has net income of $500,000 in the first year after the acquisition, give the entry for Buyer. g. In the last month of the first fiscal year after the acquisition, Buyer sells $500,000 of identical items (inventory) to Seller. Buyer's internal cost is $400,000 and Seller sells 40% of these items to a customer before the end of the year for $600,000, seller then sells the remaining 60% to a customer in the first month of the next fiscal year for $900,000. What is the total effect of these transactions on Buyer's and Seller's income statements in year 1 (give a pretax profit amount): Buyer Seller

Explanation / Answer

a)Accounting acquisition premium is the difference between the actual price paid to acquire a company and the estimated real value of the acquired company before the acquisition.

b) AAP of $2.2 Million is identifiable in Cash$2 Million,PP&E $0.6 Million,Debt($0.4 Million)

C) Goodwill:

c)

d)

e)

f)

(In Millions) Sl.No Particulars Amount($) 1 Cash 2 2 Patent 0.2 3 PP&E 0.6 4 Debt 0.4 5 Fair value(1+2+3-4) 2.4 6 Consideration Paid 5 7 Goodwill(6-5) 2.6

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