Evaluate the allocation of the acquisition price
Cost Accounting
Question :
Pemberton Company acquired all of the liabilities and assets of the Samuelson Corporation for cash on 1st January, 2012, and subsequently dissolved Samuelson Corporation. On the acquisition date, the subsequent fair and book values for Samuelson were used:
Book Values Fair Values
Current Assets $180,000 $180,000
Building 270,000 150,000
Land 30,000 60,000
Trademark 0 90,000
Goodwill 45,000 ???
Liabilities (120,000) (120,000)
Common Stock and Additional Paid-in Capital (300,000)
Retained Earnings (105,000)
Part A. Using the acquisition method; prepare Pemberton Company’s entry to record its acquisition of the Samuelson Corporation, considering $435,000 was paid.
Part B. Using the acquisition method; prepare Pemberton Company’s entry to record its acquisition of the Samuelson Corporation, considering $330,000 was paid.
On 1/1/2009, Mama Mia Company acquired an 80 percent interest in Baby wear Corporation for $425,000. The acquisition date fair value of the 20 % non-controlling interest’s ownership shares was $102,000. Also as of that date, Baby wear reported total stockholders’ equity of $400,000. It consisted of $100,000 in general stock and $300,000 in retained earnings. In setting the acquisition price, Mama Mia identified four assets with fair values different from book values for Babywear, as given:
Buildings (8-year life) were undervalued by $20,000
Land was undervalued by $50,000
Equipment (5-year life) was undervalued by $12,500
Royalty agreements (20-year life) were not recorded, but had a fair value of $30,000
As of 12/31/2013, the trial balances of both companies were as given:
Mama Mia Co. Babywear Corp.
DR CR DR CR
Current Assets $605,000 $280,000
Investment in Babywear 425,000 0
Land 200,000 300,000
Buildings (net) 640,000 290,000
Equipment (net) 380,000 160,000
Expenses 550,000 190,000
Dividends 90,000 20,000
Liabilities 910,000 300,000
Common stock 480,000 100,000
Retained Earnings 1/1/13 704,000 480,000
Revenues 780,000 360,000
Dividend Income 16,000
TOTALS $2,890,000 $2,890,000 $1,240,000 $1,240,000
Included in these figures is a $20,000 debt that Babywear owes to the parent, Mama Mia. Consider this is a present liability. There were no Goodwill impairments since the acquisition.
Additional information:
Since the trial balance for the parent company indicates the investment in Babywear to be the original acquisition amount, and Dividend income is reported, it is clear that the investment account has not been updated to reflect the total income of Babywear or the distribution of dividends from Babywear. In other words, the equity technique was not applied. The 1/1/2013 Retained Earnings account balance for Mama Mia. In addition, the excess amortization and depreciation of undervalued assets has not been accounted for on Mama Mia’s books.
Fair value of Babywear on the acquisition date is purchase price plus the fair value of the NCI, or $527,500
Directions:
1. Evaluate the allocation of the acquisition price to undervalued assets and Goodwill
2. Evaluate the amounts of 4 years’ excess depreciation/amortization for the undervalued assets, from 2009-2012
3. Do the worksheet entries you would need to make the consolidation worksheet for Babywear and Mama Mia. You have six different worksheet entries:
a. Adjust the Investment account, to indicate the Investment account balance considering the equity method was used. HINT: Adjust parent’s retained earnings to balance based on the equity method.
b. remove the equity accounts of Baby wear and the (updated) Investment account. HINT: NCI is $116,000CR
c. Record excess amortization/ depreciation of undervalued assets for 2009-2012 (your results from part 2)
d. Remove the intra-entity dividend payments
e. Record excess amortization/ depreciation of undervalued assets for 2013
f. Remove the intra-entity debt of $20,000
