Question

Using the acquisition method, prepare the necessary journal entries and a consolidating worksheet the Richard will make if Kathy retains separate legal incorporation and maintain its own accounting systems. The market price of Richard Company's stock on the day of the acquisition is $45 per share.

	Richard Company	Kathy Company	Kathy Company
	Book Values	Book Values	Fair Values
	12/31/2017	12/31/2017	12/31/2017
Cash	687,500.00	247,500.00	247,500.00
Receivables	1,067,000.00	308,000.00	346,500.00
inventory	1,545,500.00	715,000.00	847,000.00
Building & Equipment, Net	9,790,000.00	1,006,500.00	1,017,500.00
Unpatented Technology	-	-	440,000.00
In-Process Research & Development	-	-	220,000.00
Total Assets	13,090,000.00	2,277,000.00	3,118,500.00
Accounts Payable	440,000.00	99,000.00	99,000.00
Notes Payable	3,740,000.00	1,353,000.00	1,353,000.00
Common Stock $20 par value	2,200,000.00	-
Common Stock $5 par value	-	242,000.00
Addtl Paid in Capital	990,000.00	110,000.00
Retained Earnings	5,720,000.00	473,000.00
Total Liabilities and Equity	13,090,000.00	2,277,000.00	1,452,000.00
Total Fair values (Assets-Liabilities)			1,666,500.00

Additional information:

On 12/31, Richard issues 40,000 shares of its $20 par value common stock for all of the outstanding shares of Richard Company.

As par of the acquisition agreement, Richard agrees to pay the former owners of Kathy Company $350,000 if certain profit projections are realized over the next three years. Richard calculates the acquisition date fair value of this contingency at $150,000.

In creating this combination, Richard pays $15,000 in stock issue costs and $25,000 in accounting and legal fees.

	Richard Company	Kathy Company
	Book Values	Book Values
	12/31/2017	12/31/2017
Retained Earnings 1/1/17	2,530,000.00	165,000.00
Revenues	7,810,000.00	1,210,000.00
Expenses	4,620,000.00	902,000.00

Answer 1

The first step in recording a purchase under the acquisition method is to measure the value of the acquired assets and liabilities on the purchase date. With few exceptions, the acquirer uses the fair values -- the prices at which the items would freely sell -- as the book value of the tangibles. A neutral third party might determine the fair values.
	Debit	Credit
Shareholders of Kathy Company	1,666,500
Investment in Kathy Company (Total Fair values (Assets-Liabilities)		1,666,500
(being Purchase Consideration for Acquiring Kathy Company)
An acquirer can cash for a target. Other forms of consideration include common and preferred shares, debt, contingencies and other asset types. Payment can even include factories and equipment. The acquirer values any non-cash consideration at its fair value on the acquisition date. The acquirer may also need to make additional payments, called earn-outs, to target shareholders if specified events occur within a set time frame following the acquisition date. Earn-outs allow the target’s shareholders to benefit from deals in the works at the time of acquisitions
Investment in Kathy Company (Total Fair values (Assets-Liabilities)	1,666,500
Capital Rserve (balancing Figure)@@	323,500
Common Stock(market Value)		1,800,000
Contingency of Kathy Company ( Faor Value)		150,000
Stock Issue Costs		15,000
Accounting and Legal Fees		25,000
(being Discharge of Purchase consideration)
@@
The acquirer treats the excess of the acquisition cost over the fair value of the target as "Goodwill", an intangible asset. The total cost equals consideration paid plus non-controlling interest minus identifiable assets acquired plus identified liabilities accrued. If the acquirer’s cost is less than the fair value, the acquirer books the "bargain purchase" amount as a gain on its income statement. It is called "Capital Reserve"