Question

Polaris Company acquires all of the stock of SSC, Inc. for $60 million in cash. At the date of acquisition, SSC’s current assets had a book value of $20 million, its noncurrent assets had a book value of $80 million, and its liabilities had a book value of $90 million. It is determined that the book values of SSC’s net assets approximate fair value at the date of acquisition. SSC’s shareholders’ equity consists of capital stock of $2 million, retained earnings of $9 million (credit balance), and treasury stock of $1 million.

Required: Prepare the eliminating entries necessary to consolidate the balance sheet accounts of Polaris and SSC at the date of acquisition.

Answer 1

Net assets of SSC at the date of acquisition is equal to $10 million. In case of a wholly owned subsidiary, the parent company recognises goodwill on the date of acquisition, which is measured as the excess of consideration transferred (computed at fair value) over the value of net identifiable assets acquired by it under business combination.

Therefore, the eliminating entry necessary to consolidate the balance sheet accounts of Polaris and SSC at the acquisition date will be as follows-

(Amounts in million $)

Capital stock 2

Retained earnings 9

Goodwill (Bal.figure) 50

Treasury stock 1

Investment in SSC 60