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It’s been a while since I’ve done any consolidation accounting. My question is why are the 10,000 shares exchanged used as the acquisition cost and not the 100,000 acquired?
On 12/31/Year 1, Passey Co. acquired a 100% interest in Solomon Co. by exchanging 10,000 shares of its common stock for 100,000 shares of Solomon’s common stock. The fair market value of Passey’s common stock on December 31, Year 1, was $9 per share, and the fair value of Solomon’s was $3.50 per share.
Additional information as of December 31, Year 1, is as follows:
Solomon Co.
Book Values: Current Assets = 115,000; Plant Assets = 200,000; Liabilities = 10,000
Fair Values: Current Assets = 115,000; Plant Assets = 255,000; Liabilities = 10,000
Passey Co.
Book Value: Plant assets: 1,700,000
Fair Value: Plant assets: 1,800,000
Passey Co.’s consolidated financial statements as of December 31, Year 1, would report:
a. Gain of $270,000.
b. A deferred credit (negative goodwill) of $235,000.
c. A deferred credit (negative goodwill) of $270,000.
d. Gain of $235,000.
Explanation
Choice “a” is correct. When acquiring a subsidiary with an acquisition cost that is less than the fair value of 100% of the underlying assets acquired, adjust all balance sheet accounts to fair value and allocate remaining acquisition costs to the fair value of 100% of identifiable intangible assets. This creates a negative balance in the acquisition cost account, which is allocated to gain.
Acquisition cost
$ 90,000
($90 / share × 10,000 shares)
– BV net assets
305,000
($115,000 + $200,000 − $10,000)
Discount
(215,000)
Adjust assets to FV
(55,000)
($255,000 FV fixed assets − $200,000 BV fixed assets)
Gain
$ (270,000)
Choice “d” is incorrect, per the above calculation.
Choices “b” and “c” are incorrect since any bargain purchase is now credited to gain, not to negative goodwill.
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