Question

Asset acquisition vs. stock acquisition (fair value is different from book value)
The following financial statement information is for an investor company and an investee company on January 1, 2019. On January 1, 2019, the investor company’s common stock had a traded market value of $35 per share, and the investee company’s common stock had a traded market value of $31 per share.

	Book Values		Fair Values
	Investor	Investee	Investor	Investee
Receivables & inventories	$120,000	$60,000	$108,000	$54,000
Land	240,000	120,000	360,000	180,000
Property & equipment	270,000	120,000	300,000	156,000
Trademarks & patents	—	—	180,000	96,000
Total assets	$630,000	$300,000	$948,000	$486,000
Liabilities	$180,000	$96,000	$216,000	$114,000
Common stock ($1 par)	24,000	12,000
Additional paid-in capital	336,000	180,000
Retained earnings	90,000	12,000
Total liabilities & equity	$630,000	$300,000
Net assets	$450,000	$204,000	$732,000	$372,000

Required (Parts a. and b. are independent of each other.)
a. Assume that the investor company issued 11,400 new shares of the investor company’s common stock in exchange for all of the individually identifiable assets and liabilities of the investee company. The financial information presented, above, was prepared immediately before this transaction. Provide the Investor Company’s balances (i.e., on the investor’s books, before consolidation) for the following accounts immediately following the acquisition of the investee’s net assets:

Receivables & Inventories	Answer
Land	Answer
Property & Equipment	Answer
Trademarks & Patents	Answer
Investment in Investee	Answer
Goodwill	Answer
Total Assets	Answer
Liabilities	Answer
Common Stock ($1 par)	Answer
Additional Paid-In Capital	Answer
Retained Earnings	Answer
Total Liabilities and Equity	Answer

b. Assume that the investor company issued 11,400 new shares of the investor company’s common stock in exchange for all of the investee company’s common stock. The financial information presented, above, was prepared immediately before this transaction. Provide the Investor Company’s balances (i.e., on the investor’s books, before consolidation) for the following accounts immediately following the acquisition of the investee’s net assets:

Receivables & Inventories	Answer
Land	Answer
Property & Equipment	Answer
Trademarks & Patents	Answer
Investment in Investee	Answer
Goodwill	Answer
Total Assets	Answer
Liabilities	Answer
Common Stock ($1 par)	Answer
Additional Paid-In Capital	Answer
Retained Earnings	Answer
Total Liabilities and Equity	Answer

Answer 1

Solution:

REQUIREMENTS:

PART A: ASSET ACQUISITION BY INVESTOR

TOTAL PURCHASE CONSIDERATION GIVEN = 11400* $35	$399000
LESS: FAIR VALUE OF NET ASSETS ACQUIRED	$372000
GOOD WILL ON ACQISITION	$27000

DISCHARGE OF PURCHASE CONSIDERATION	$399000
IN THE FORM OF COMMON STOCK - 11400*$1(PAR)	$11400
IN THE FORM OF ADDITIONAL PAID IN CAPITAL- 11400*$34	$387600

EXTRACT OF BALANCE SHEET OF INVENTORY COMPANY

PARTICULARS	BOOK VALUE OF INVESTOR	FAIR VALUE OF INVESTEE	TOTAL
RECEIVABLES AND INVENTORIES	$120000	$54000	$174000
LAND	$240000	$180000	$420000
PROPERTY AND EQUIPMENT	$270000	$156000	$426000
TRADEMARKS AND PATENTS	$ --	$96000	$96000
INVESTMENT IN INVESTEE	$ --
GOODWILL		$27000	$27000
TOTAL ASSETS			$1143000
LIABILITIES	$180000	$114000	$294000
COMMON STOCK($1 PAR)	$24000	$11400	$35400
ADDITIONAL PAID-IN CAPITAL	$336000	$387600	$723600
RETAINED EARNINGS	$90000		$90000
TOTAL LIABILITIES AND EQUITY			$1143000

PART B: STOCK ACQUISITION BY INVESTOR

TOTAL PURCHASE CONSIDERATION GIVEN = 11400* $35	$399000
LESS: FAIR VALUE OF NET ASSETS ACQUIRED	$372000
GOOD WILL ON ACQISITION	$27000

DISCHARGE OF PURCHASE CONSIDERATION	$399000
IN THE FORM OF COMMON STOCK - 11400*$1(PAR)	$11400
IN THE FORM OF ADDITIONAL PAID IN CAPITAL- 11400*$34	$387600

EXTRACT OF BALANCE SHEET OF INVENTORY COMPANY

PARTICULARS	BOOK VALUE OF INVESTOR	ACQUISITIONS MADE	TOTAL
RECEIVABLES AND INVENTORIES	$120000		$120000
LAND	$240000		$240000
PROPERTY AND EQUIPMENT	$270000		$270000
TRADEMARKS AND PATENTS	$ --
INVESTMENT IN INVESTEE	$ --	$372000	$372000
GOODWILL		$27000	$27000
TOTAL ASSETS			$1029000
LIABILITIES	$180000		$180000
COMMON STOCK($1 PAR)	$24000	$11400	$35400
ADDITIONAL PAID-IN CAPITAL	$336000	$387600	$723600
RETAINED EARNINGS	$90000		$90000
TOTAL LIABILITIES AND EQUITY			$1029000

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