Question

Smith Company is acquired by Roan Corporation on July 1, 2015. Roan exchanges 60,000 shares of its $1 par stock, with a fair value of $18 per share, for the net assets of Smith Company.

Roan incurs the following costs as a result of this transaction:

Acquisiton costs................................................$25,000

Stock registration and issuance costs................10,000

Total costs.........................................................$35,000

The balance sheet of Smyth Company, on the day of the acquisition, is as follows:

Assets:

Cash............................................$100,000

Inventory........................................250,000

Property, plant, and equipment:

Land.....................$200,000

Buildings (net)........250,000

Equipment (net).....200,000..........650,000

Total assets...............................$1,000,000

Liabilities and Equity

Current liabilities.....$80,000

Bonds Payable........500,000.......$580,000

Stockholders' equity:

Common Stock......$200,000

Paid-in capital in excess of par...100,000

Retained earnings...120,000........420,000

Total Liabilities and equity.............$1,000,000

The appraised fair values as of July 1, 2015 is as follows:

Inventory................................$270,000

Equipment...............................220,000

Land........................................180,000

Buildings.................................300,000

Current liabilities.......................80,000

Bonds payable.........................425,000

Record the acquisition of Smyth Company on the books of Radar Corporation.

Answer 1

Journal entries in the books of Roan / Radar Corporation

1. Recording of Assets and Liabilities taken over:

Cash a/c Dr 100,000

Inventory a/c Dr 270,000

Land a/c Dr 180,000

Buildings a/c Dr 300,000

Equipement a/c Dr 220,000

Goodwill (Balancing figure) a/c Dr 515,000

To Current Liablities a/c 80,000

To Bonds a/c 425,000

To Business Purchase a/c 10,80,000

(Being assets and liablities taken over at fair values from Smith Co.)

2. Recognising the Due for Business Purchase:

Business Purchase a/c Dr 10,80,000

To Smith Co. a/c 10,80,000

(Being business from Smith Co. is acquired at a Purchase Consideration of 10,80,000)

3. Discharge of Purchase Consideration:

Smith Co. a/c Dr. 10,80,000

To Equity Share Capital a/c 60,000

To Securities Premium a/c 10,20,000

(Being Purchase Consideration is discharged at 18/- per equity share at a par value of 1/-)

4. Recording of Acquistion Expenses:

Acquisition Expenses a/c Dr 35,000

To Bank a/c 35,000

(Being acquisition expenses recorded)

5. Adjustment of Acquisition Expenses against Goodwill:

Goodwill a/c Dr 35,000

To Acquisition expenses a/c 35,000

(Being acquisition expenses is adjusted against Goodwill on account of acquisition of Smith Co.)