Question

Pokemon Corp purchased 60% of the shares of Simpsons Corp on December 31, 2020 for $2,460,000. The fair values of all the assets and liabilities of Simpsons Corp on that date were equal to their book values. The shareholders’ equity of Simpsons Corp. at December 31, 2020 was comprised of the following accounts: Preferred Shares (100,000 outstanding) $1,000,000 Common shares 2,000,000 Retained Earnings 500,000 $3,500,000 The preferred shares are redeemable at the option of Simpsons Corp at a premium of 10% of the face value. The preferred shares are cumulative and pay dividends of $1 per share per year. The dividends on the preferred shares were last paid on December 31, 2018. Required – (Please use the Fair Value Enterprise Method (Entity Method) for the below)

A) Prepare the purchase price allocation. (5 Points)

Answer 1

Purchase price alloaction would be :

Particulars	Amount	Amount ($)
Purchase Consideration		24,60,000 $
Allocation would be :
Equity Capital (20,00,000*60%)	12,00,000 $
Retained Earning (5,00,000*60%)	3,00,000 $
Preferred Shares (1,00,000 shares * 10$* 60%)	6,00,000 $
Premium on preferred shares (10%)	60,000 $
Cummulative Preference Dividend (Its mentioned that company has last paid dividend on 31.12.2018, hence two years dividend is pending) (100000 shares * 1$* 2years)	2,00,000 $
Goodwill (Bal Figure)	1,00,000 $
Total		24,60,000 $

Hope this answer bring better conceptual clarity.

Thank You!