Big Company acquires 100% of the common stock of Small Company for consideration

Question

Big Company acquires 100% of the common stock of Small Company for consideration of $3,400,000; Small Co. will continue to operate as a separate legal entity. Prior to the acquisition, small had its assets appraised, noting the following differences between book value and fair value:

-Receivables were overstated by $20,000

-Inventory and Equipment fair values were $440,000 and $200,000 higher than book value, respectively

-Its unpatented technology was worth $1,000,000 and various intangible assets had a fair value of $200,000 (the technology and intangible were previously expensed as costs were incurred).

Required: Below are the post-acquisition balance sheets. Complete the consolidation worksheet below.

Retained Earnings

Big Co. Small Co. Debit                  Credit                  Consolidated            Cash 1,140,000 400,000 Receivable 1,800,000 600,000 Inventory 2,200,000 1,200,000 Property & Equip (net) 18,000,000 1,600,000 Investment in Small 3,400,000 0 Unpatented tech 1,000,000 Various intangible assetss 200,000 Total Assets 26,540,000 5,000,000 Short Term Payable (800,000) (400,000) Long Term Payables (7,000,000) (2,200,000) Common Stock (6,000,000) (440,000) APIC (2,980,000) (200,000)

Retained Earnings

(9,760,000) (560,000) Total Liab & Equity ($26,540,000) ($3,800,000)

Explanation / Answer

On acquisition:

Elimination entry:

Consolidated balancesheet:

Shareholder Holding Fair value Parent 100%        3,400,000 Non controlling interest 0%                        -   Fair value of subsidiary 100%        3,400,000

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