Course: Advanced Accounting 2
Chapter 2: Consolidated Financial Statement: On the Date of Business
Combination
Example 1: Consolidation of wholly owned subsidiary on date of business
combination
On December 31, 2013, Palm Corporation issued 10,000 shares of its $10 par common
stock (current fair value $45 a share) to stockholders of Starr Company for all the
outstanding $5 par common stock of Starr. Out- of-pocket costs of the business
combination paid by Palm on December 31, consisted thefollowing.
Finder’s and legal fees relating to business combination $50,000
Cost associated with SEC registration Statement for C/S $35,000
Assume also that Starr Company was to continue its corporate existence as wholly owned
subsidiary of Palm Corporation. Both constituent companies had a December 31 fiscal
year and used same accounting principles and procedures; thus no adjustment was
required for either company prior to the combination. The income tax rate for each
company was 40%.
Financial Statements for Palm Corporation and Starr Company for the year ended
December 31, 2013, prior to consummation of the business combination are as follows
Balance Sheet Palm Starr
Assets
Cash $100,000 $40,000
Inventories 150,000 110,000
Other current assets 110,000 70,000
Receivable from Starr Company 25,000
Plant assets (net) 450,000 300,000
Patent (net) - 20,000
Total assets $835,000 $540,000
Liabilities and Stockholders’ Equity
Payables to Palm corporation - $25,000
Income tax payable $26,000 10,000
Other liabilities 325,000 115,000
Common Stock, $10 par 300,000
Common Stock, $5 par 200,000
Additional paid-in-capital 50,000 58,000
Retained earnings 134,000 132000
Total liabilities and stockholders’ equity $835,000 $540,000
Lecturer: Jimale Abdillahi
The December 31, 2013, current fair values of Starr Company’s identifiable assets and
liabilities were the same as their carrying amounts, except for the three assets listed
below.
Inventories $135,000
Pant assets (net) 365,000
Patent (net) 25,000
Because Starr was to continue as separate Corporation and current generally accepted
accounting principles do not sanction write-ups of assets of a going concern, Starr did
not prepare journal entries for the business combination.
Requirements and Instructions
a) Journalize the issuance of 10,000 shares for all the outstanding common stock of
Starr Co. in the business combination process
b) Journalize the payment of out-of-pocket costs of the business combination
c) Post the ledger accounts of the combiner affected by business combination
d) Calculate goodwill
e) Prepare consolidated balance sheet with use of working papers
Example 2: Consolidation of partially owned subsidiary on date of business
combination
On December 31,2005, Post Corporation issued 57,000 shares of its $1 par common
stock (current fair value $20 a share) to stockholders of Sage Company in exchange for
38,000 of the 40,000 outstanding shares of Sage's $10 par common stock in a business
combination. Thus, Post acquired a 95% interest (38,000 /40,000= 0.95) in Sage, which
became Post's subsidiary. Out-of-pocket costs of the combination, paid in cash by Post
on December 31, 2005, were as follows:
Finder's and legal fees relating to business combination $52,250
Costs associated with SEC registration statement $72,750
Total out-of-pocket costs of business combination $125,000
Financial statements of Post Corporation and Sage Company for their fiscal year ended
December 31, 2005, prior to the business combination, are on page 221. There were no
intercompany transactions prior to the combination.
Lecturer: Jimale Abdillahi
Lecturer: Jimale Abdillahi
Requirements and Instructions
a. Journal Entries for Business Combination (acquisition of 95% of subsidiary's
outstanding common stock)
b. Record out-of-pocket costs
c. Update Ledger Accounts of Combiner Affected by Business Combination
d. Calculate Current Fair Values and Carrying Amounts of Combinee’s Identifiable
Assets
e. Compute Minority Interest in Combinee's Identifiable Net Assets
f. Computation of Goodwill Acquired by Combiner
g. Prepare Working Paper for Consolidated Balance Sheet for Partially Owned
Subsidiary on Date of Business Combination
h. Prepare Consolidated Balance sheet
Lecturer: Jimale Abdillahi