Question

Date of Acquisition Consolidation Eliminating Entries, Bargain Purchase

Peregrine Company acquired 80 percent of Sparrow Company’s common stock for $20,000,000 in cash; fees paid to an outside firm to estimate the earning power of Sparrow and the fair values of its properties amounted to $2,500,000. Sparrow’s equity consisted of $3,000,000 in capital stock, $25,000,000 in retained earnings, $1,500,000 in accumulated other comprehensive loss, and $500,000 in treasury stock. Book values of Sparrow’s identifiable assets and liabilities approximated their fair values except as noted below:

	Book value	Fair value
Land	$1,000,000	$300,000
Other plant assets, net	6,000,000	4,000,000
Identifiable intangible assets	--	3,000,000

Assume that the fair values above have been carefully evaluated for accuracy. The fair value of the noncontrolling interest is estimated to be $4,000,000 at the date of acquisition.

Required

a. Calculate the gain on acquisition and prepare Peregrine’s acquisition entry.

Enter answers in thousands ($20,000,000 equals $20,000 in thousands).

Description		Debit	Credit
Investment in Sparrow		Answer	Answer
Answer		Answer	Answer
Cash		Answer	Answer
Answer		Answer	Answer

b. Prepare the working paper eliminating entries needed to consolidate Peregrine and Sparrow at the date of acquisition.

Enter answers in thousands ($20,000,000 equals $20,000 in thousands).

Ref.	Description	Debit	Credit
(E)	Capital stock	Answer	Answer
	Answer	Answer	Answer
	Answer	Answer	Answer
	Treasury stock	Answer	Answer
	Investment in Sparrow	Answer	Answer
	Noncontrolling interest in Sparrow	Answer	Answer
	Identifiable intangible assets	Answer	Answer
(R)	Answer	Answer	Answer
	Answer	Answer	Answer
	Land	Answer	Answer
	Investment in Sparrow	Answer	Answer

Answer 1

Answer :-

a. Calculate the gain on acquisition and prepare Peregrine’s acquisition entry.

Account details	Amount	Amount
Fair value of consideration transferred		$20,000,000
Fair value of on consideration interest		$4,000,000
Total		= $20,000,000 + $4,000,000 = $24,000,000
Fair value of net assets :
As per books
Equity	$3,000,000
Retained earnings	$25,000,000
Accumulated loss	$1,500,000
Total book values of assets / liabilities	= [ $3,000,000 + $25,000,000 ] - $1,500,000 = $26,500,000
Fair value adjustments :
Land	= $1,000,000 - $300,000 = $700,000
Other plant assets	= 6,000,000 - 4,000,000 = $2,000,000
Identifible intangible assets	$3,000,000
Total fair values of assets		= [$26,500,000 + $3,000,000 ] - [$700,000 + $2,000,000 ] = 29,500,000 - 2,700,000 = $26,800,000
Net gain of acquisation		=  $26,800,000 -  $24,000,000 = $2,800,000

b. Prepare the working paper eliminating entries needed to consolidate Peregrine and Sparrow at the date of acquisition:-

Account details	Debit	Credit
Net assets in sparrow	$26,800,000
Investment in sparrow		$20,000,000
Non controlling interest		$4,000,000
Gain on acquisition		$2,800,000
( To record book accounts )
Profit and loss	= $500,000 / 2 = $2,50,000
Cash		$2,50,000