Question

On January 1, NewTune Company exchanges 17,496 shares of its common stock for all of the outstanding shares of On-the-Go, Inc. Each of NewTune’s shares has a $4 par value and a $50 fair value. The fair value of the stock exchanged in the acquisition was considered equal to On-the-Go’s fair value. NewTune also paid $31,250 in stock registration and issuance costs in connection with the merger.

Several of On-the-Go’s accounts’ fair values differ from their book values on this date:

	Book Values				Fair Values
Receivables	$	79,000			$	72,100
Trademarks		99,250				260,500
Record music catalog		80,000				240,500
In-process research and development		0				231,000
Notes payable		(60,750	)			(51,400	)

Precombination book values for the two companies are as follows:

	NewTune				On-the-Go
Cash	$	60,750			$	35,750
Receivables		96,250				79,000
Trademarks		404,000				99,250
Record music catalog		923,000				80,000
Equipment (net)		365,000				112,000
Totals	$	1,849,000			$	406,000
Accounts payable	$	(189,000	)		$	(58,250	)
Notes payable		(416,000	)			(60,750	)
Common stock		(400,000	)			(50,000	)
Additional paid-in capital		(30,000	)			(30,000	)
Retained earnings		(814,000	)			(207,000	)
Totals	$	(1,849,000	)		$	(406,000	)

1. Assume that this combination is a statutory merger so that On-the-Go’s accounts will be transferred to the records of NewTune. On-the-Go will be dissolved and will no longer exist as a legal entity. Prepare a postcombination balance sheet for NewTune as of the acquisition date.

Assets		Liabilities and Stockholders’ Equity
cash			Accounts payable
receivables			Notes payable
Trademarks			Common stock
Record music catalog			Additional paid-in capital
Research and development			Retained earnings
Equipment
Goodwill
Total assets	$		Total liabilities and equities	$

2.Assume that no dissolution takes place in connection with this combination. Rather, both companies retain their separate legal identities. Prepare a worksheet to consolidate the two companies as of the combination date.

Accounts	Newtune Co	On-the-Go, Inc.	Debit	Credit	Consolidated Totals
Cash
Receivables
Investment in On-the-Go
Trademarks
Record music catalog
R & D asset
Equipment
Goodwill
Total assets	$        0	$          0			$                0
Accounts payable
Notes payable
Common stock
Additional paid-in capital
Retained earnings
Total liabilities and equities	$          0	$        0	$         0	$             0	$          0

Answer 1