Question

Liberty Inc. acquired 100% of the voting common stock of Valance Inc. on January 1, 2018 by issuing 4,000 shares of Liberty Inc. $40 par value common stock that had a fair value of $120 per share. Valance Inc. will dissolve after the acquisition. Liberty incurred $40,000 of legal and accounting fees; and paid $25,000 in stock issuance costs as a result of this acquisition. The book value and fair value of Valance’s accounts on that date (prior to creating the combination) along with the book value of Pace's accounts are shown below:

           

	Liberty	Valance	Valance
	Book	Book	Fair
	Value	Value	Value
Retained earnings, 1/1/18	$(250,000)	$(240,000)
Cash Receivables	100,000     70,000	20,000     50,000	$20,000 50,000
Inventory	230,000	170,000	210,000
Land	280,000	220,000	240,000
Buildings (net)	480,000	240,000	270,000
Equipment (net)	120,000	90,000	90,000
Liabilities	(650,000)	(430,000)	(420,000)
Common stock	(360,000)	(80,000)
Additional paid-in capital	(20,000)	(40,000)

Answer 1

Fair value of net assets
Cash	$              20,000
Receivables	$              50,000
Inventory	$            210,000
Land	$            240,000
Buildings	$            270,000
Equipment	$              90,000
Total fair value of assets	$            880,000
Less: Liabilities	$            420,000
Fair value of net assets	$            460,000
Paid in capital (4000*120)	$            480,000
Less: Fair value of net assets	$         (460,000)
Add: legal and accounting fees	$              40,000
Add: stock issuance costs	$              25,000
Value of goodwill	$              85,000
Cash paid for legal and accounting fees	$              40,000
Cash paid for stock issuance costs	$              25,000
Total cash paid	$              65,000
Less: cash received	$              20,000
Net cash paid (credited)	$              45,000

Date	Account title and explanation	Debit	Credit
January 1, 2018	Receivables	$          50,000
	Inventory	$        210,000
	Land	$        240,000
	Buildings	$        270,000
	Equipment	$          90,000
	Goodwill	$          85,000
	Liabilities		$        420,000
	Common stock (4000*40)		$        160,000
	Additional paid-in capital (4000*(120-40))		$        320,000
	Cash		$          45,000
	To record the acquisition of Valance Inc.