Question

Determining ending balances of accounts on the consolidated balance sheet Assume that the parent company acquires its subsidiary by exchanging 80,000 shares of its Common Stock, with a fair value on the acquisition date of $24 per share, for all of the outstanding voting shares of the investee. In its analysis of the investee company, the parent values all of the subsidiary’s assets and liabilities at an amount equaling their book values except for a building that is undervalued by $400,000, an unrecorded License Agreement with a fair value of $200,000, and an unrecorded Customer List owned by the subsidiary with a fair value of $100,000. Any further discrepancy between the purchase price and the book value of the subsidiary’s Stockholders’ Equity is attributed to expected synergies to be realized by the consolidated company as a result of the acquisition. a. Given the following acquisition-date balance sheets of the parent and subsidiary, at what amounts will each of the following be reported on the consolidated balance sheet? (see table numbered 1-7 to answer) Balance Sheet Parent Subsidiary Assets Cash $700,000 $200,000 Accounts receivable 300,000 400,000 Inventory 450,000 500,000 Equity investment 1,920,000 Property, plant and equipment (PPE), net 1,500,000 900,000 $4,870,000 $2,000,000 Liabilities and stockholders’ equity Accounts payable $150,000 $100,000 Accrued liabilities 180,000 200,000 Long-term liabilities 1,000,000 550,000 Common stock 140,000 100,000 APIC 2,000,000 150,000 Retained earnings 1,400,000 900,000 $4,870,000 $2,000,000

Answer 1

	Parent Company	Subsidiary Company	Consolidation effect	Consolidated position
Assets
Cash	700,000	200,000		900,000
Account receivable	300,000	400,000	100,000	800,000
Inventory	450,000	500,000		950,000
Equity investment	1,920,000		(1,920,000)	-
Intangibles (license agreement)			200,000	200,000
PPE	1,500,000	900,000	400,000	2,800,000
Goodwill			70,000	70,000
Total	4,870,000	2,000,000	(1,150,000)	5,720,000
Liabilities
Accounts payable	150,000	100,000		250,000
Accrued liablities	180,000	200,000		380,000
Long term liability	1,000,000	550,000		1,550,000
Common stock	140,000	100,000	(100,000)	140,000
APIC	2,000,000	150,000	(150,000)	2,000,000
Retained earnings	1,400,000	900,000	(900,000)	1,400,000
Total	4,870,000	2,000,000	(1,150,000)	5,720,000
Computation of goodwill
Book value of assets of subsidiary	2,000,000
Less: Book value of liabilities of subsidiary	850,000
Net book value	1,150,000
Adjustment
Building	400,000
License agreement	200,000
Unrecorded customer	100,000
NAV taken over	1,850,000
price paid by shares	1,920,000
Good will	70,000