Question

Assume that the parent company acquires its subsidiary by exchanging 55,000 shares of its Common Stock, with a market value on the acquisition date of $40 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 it feels is undervalued by $500,000, an unrecorded License Agreement that the parent values at $250,000, and an unrecorded Customer List owned by the subsidiary that the parent values at $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.
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?
Balance Sheet
Parent Subsidiary
Assets
Cash $910,500 $201,600
Accounts receivable 384,000 417,600
Inventory 582,000 536,400
Equity investment 2,200,000
Property, plant and equipment (PPE), net 2,799,600 992,400
$6,876,100 $2,148,000
Liabilities and stockholders' equity
Accounts payable $188,100 $127,000
Accrued liabilities 220,800 221,000
Long-term liabilities 1,000,000 600,000
Common stock 220,000 120,000
APIC 3,740,000 150,000
Retained earnings 1,507,200 930,000
$6,876,100 $2,148,000

Answer 1

Answer:

Consolidated Balance Sheet:

Balance Sheet

                                                     Parent          Subsidiary   Consolidated

Assets

Cash                                           $910,500      $201,600     $1,112,100

Accounts receivable                   384,000         417,600        801,600

Inventory                                     582,000        536,400     1,118,400  

Equity investment                   2,200,000                            0

Property, plant and

equipment (PPE), net             2,799,600      1,492,400      4,292,000

License Agreement                                         250,000        250,000

Customer List                                                   100,000         100,000

Goodwill                                                                               1,000,000

Total Assets                           $6,876,100 $2,998,000     $8,674,100

Liabilities & stockholders' equity

Accounts payable                     $188,100      $127,000           315,100

Accrued liabilities                     220,800        221,000           441,800

Long-term liabilities               1,000,000       600,000       1,600,000

Unrealized gain from fair value:

Building                                                           500,000       500,000

License Agreement                                       250,000       250,000

Customer List                                                 100,000        100,000

Common stock                        220,000        120,000        220,000

APIC                                       3,740,000        150,000     3,740,000

Retained earnings                 1,507,200       930,000      1,507,200

Total liabilities and equity   $6,876,100  $2,998,000  $8,674,100

Explanation:

a) Data:

Balance Sheet

                                                     Parent             Subsidiary

Assets

Cash                                           $910,500           $201,600

Accounts receivable                   384,000              417,600

Inventory                                     582,000             536,400

Equity investment                   2,200,000

Property, plant and

equipment (PPE), net             2,799,600            992,400

Total Assets                           $6,876,100        $2,148,000

Liabilities & stockholders' equity

Accounts payable                     $188,100           $127,000

Accrued liabilities                     220,800             221,000

Long-term liabilities               1,000,000            600,000

Common stock                        220,000             120,000

APIC                                       3,740,000             150,000

Retained earnings                 1,507,200            930,000

Total liabilities and equity   $6,876,100        $2,148,000

b) For the consolidated balance sheet, the assets and liabilities of the parent and subsidiary are consolidated based on their fair values.  The investment in the subsidiary is eliminated.  If the assets increased in their fair values, unrealized gains on fair values are created for the revalued assets.  On the equity side, the subsidiary's equity is eliminated.  Any difference is attributed to Goodwill on acquisition.