[jessanqi]

The Action Corporation issued non-voting preferred stock with a par value of $500,000 and a fair market value of $4,000,000 in exchange for all of the outstanding common stock of Master Corporation. On the date of the exchange, Master had tangible net assets with a book value of $2,000,000 and a fair market value of $2,500,000. In addition, Action issued preferred stock, with a par value of $50,000, for a finder’s fee of $400,000 to an individual for arranging the transaction. As a result of this transaction, Action should record an increase in net assets of

The correct answer is C

can someone please advise how the JE should be used in order to get this answer??

Thank you in advance!!

[Juice23]

please provide possible answers.

[jessanqi]

Below is the answer, but I don't really understand. according to the Whiley book, when acquirer purchased the acquiree by issuing stock, it debit the investment of the FV of the issuing stock and credit the par and APIC.
but on this question, it debit the investment for the amount of the received net assets..

Please help!!! Thank you in advance!!!

Explanation
The correct answer is B. Action (the acquirer) issued non-voting preferred stock with a fair market value of $4,000,000 in exchange for all of the outstanding common stock of Master Corporation (the acquiree). On the date of acquisition, Master had tangible net assets with a book value of $2,000,000 and a fair market value of $2,500,000. In addition, Action paid a finder’s fees of $400,000 by issuing additional preferred stock, valued at $400,000.

Under the acquisition method of business combinations, Action purchased 100% of the stock of Master. Since Action acquired more than 50% of the outstanding common stock of Master, they must consolidate.

The entry by Action to record the investment account and issuing preferred stock on the books, not the consolidated worksheet is:
Debit: Investment in Master $2,500,000
Credit: Preferred stock $500,000
Credit: Additional paid-in-capital, preferred stock $2,000,000
(To record acquisition of 100% interest in the net assets of Master)

The journal entry to record the finder’s fee on the books, not the consolidated worksheet is:
Debit: Finder’s fee expense $400,000
Credit: preferred stock $50,000
Credit: Additional paid-in-capital, preferred stock $350,000
(To record finder’s fee)

The net assets of Action increased $2,500,000 by recording the investment account. The finder’s fee does not affect the assets because they gave stock instead of cash.

Note: If the acquisition qualifies as a business combination then goodwill would be recognized and if it was a bargain purchase, then a gain would be recognized.

[Yahmon]

shouldn't the investment be recorded at FV of $4M? that's what action paid for master. I don't think I agree with the JE explanation unless there's information missing in the question

FAR 8/20/15 - Passed 77
AUD 10/10/15 -
BEC TBD
REG TBD

[Juice23]

The $4 Million is presumably for 100% of the stock of Master, not the assets. The Assets are still worth $2.5 Million, and should go on the books at FMV. There is another $1.5 Million of value that is not discussed in the question, Goodwill, and I think that's why this is so confusing.

[jessanqi]

Thanks for the help!! this makes a lot more sense now. 🙂

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[Author]

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