Question

On January 1, NewTune Company exchanges 19,336 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 $45,450 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	$	55,250			$	48,400
Trademarks		99,000				294,000
Record music catalog		66,250				256,000
In-process research and development		0				249,000
Notes payable		(72,500	)			(63,900	)

Precombination book values for the two companies are as follows:

	NewTune				On-the-Go
Cash	$	79,500			$	53,500
Receivables		48,500				55,250
Trademarks		478,000				99,000
Record music catalog		923,000				66,250
Equipment (net)		324,000				137,000
Totals	$	1,853,000			$	411,000
Accounts payable	$	(144,000	)		$	(40,500	)
Notes payable		(409,000	)			(72,500	)
Common stock		(400,000	)			(50,000	)
Additional paid-in capital		(30,000	)			(30,000	)
Retained earnings		(870,000	)			(218,000	)
Totals	$	(1,853,000	)		$	(99,000	)

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.

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.

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.

	NEWTUNE COMPANY AND ON-THE-GO, INC. Post-Combination Balance Sheet January 1, 2018 Assets Liabilities and Stockholders' Equity Cash Accounts payable Receivables Notes payable Trademarks Common stock Record music catalog Additional paid-in capital Research and development asset Retained earnings Equipment Goodwill Total assets $0 Total liabilities and equities $0

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. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet.)

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NEWTUNE COMPANY AND ON-THE-GO, INC. Consolidation Worksheet January 1, 2018 Consolidation Entries Accounts Newtune Co On-the-Go, Inc. Debit Credit Consolidated Totals Cash Receivables Investment in On-the-Go Trademarks Record music catalog Research and development 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

In accounting for the combination of NewTune and On-the-Go, the fair value of the acquisition is allocated to each identifiable asset and liability acquired with any remaining excess attributed to goodwill.

              Fair value of consideration transferred (shares issued)    $966,800

              Fair value of net assets acquired:

                          Cash                                                          $53,500

                          Receivables                                               48,400

                          Trademarks                                             294,000

                          Record music catalog                           256,000

                          In-process R&D                                      249,000

                          Equipment                                               137,000

                          Accounts payable                                   (40,500)

                          Notes payable                                          (63,900)             933,500

                          Goodwill                                                                                $33,300

Entry by NewTune to record combination with On-the-Go:

              Cash                                                                             53,500

              Receivables                                                                48,400

              Trademarks                                                              294,000

              Record Music Catalog                                           256,000

              Capitalized R&D                                                      249,000

              Equipment                                                                137,000                   

              Goodwill                                                                      33,300

                    Accounts Payable                                                                  40,500

                    Notes Payable                                                                         63,900

                    Common Stock (NewTune par value)                              77,344

                    Additional Paid‑in Capital                                                  889,456

              (To record merger with On-the-Go at fair value)

              Additional Paid‑in Capital                                       45,450

                          Cash                                                                                    45,450

                    (Stock issue costs incurred)

Post-Combination Balance Sheet:

   Assets                                                              Liabilities and Owners’ Equity

Cash                                        $    87,550          Accounts payable                    $   184,500

Receivables                                 96,900          Notes payable                                472,900

Trademarks                               772,000         

Record music catalog         1,179,000

Capitalized R&D                       249,000          Common stock                               477,344

Equipment                                 461,000          Additional paid‑in capital             889,456

Goodwill                                       33,300          Retained earnings                         870,000

     Total                                $ 2,894,200               Total                                      $ 2,894,200

Because On-the-Go continues as a separate legal entity, NewTune first records the acquisition as an investment in the shares of On-the-Go.

              Investment in On-the-Go Co                                                 966800

                          Common Stock (NewTune, Inc., par value)                           77,344

                          Additional Paid‑in Capital                                                        889,456

                    (To record acquisition of On-the-Go's shares)

              Additional Paid‑in Capital                                                       45,450

                          Cash                                                                                                45,450

                    (Stock issue costs incurred)

            Next, NewTune’s accounts are adjusted for the entries above to facilitate the worksheet preparation of the consolidated financial statements.

                                                                                 NEWTUNE, INC., AND ON-THE-GO CO.

            b.                                                                              Consolidation Worksheet

                                                                                                      January 1, 2018

                                                                                                                                          Consolidation Entries Consolidated       Accounts     NewTune, Inc.         On-the-Go Co.                Debit                   Credit     Totals

            Cash                                                    34,050                        53,500                                                                                                      87,550

            Receivables                                        48,500                        55,250                                            (A)     6,850                                     96,900

            Investment in On-the-Go                966,800                              -0-                                           (S) 348,048

                                                                                                                                                                  (A) 618,752 -0-

            Trademarks                                      478,000                        99,000            (A) 195,000                                                                   772,000

            Record music catalog                     923,000                        66,250            (A) 189,750                                                                1,179,000

            Capitalized R&D                                        -0-                              -0-           (A) 249,000                                                                   249,000

            Equipment                                        324,000                      137,000                                                                                                  461,000

            Goodwill                                                  -0-                             -0-            (A)   33,300                                     33,300

            Totals                                             2,774,350                      411,000                                                                                               2,894,200

            Accounts payable                            144,000                        40,500                                                                                                  144,000

            Notes payable                                  409,000                        72,500            (A)     8,600                                                                   472,900

            Common stock                                 477,344                        50,000             (S)   50,000                                                                   477,344

            Additional paid‑in capital                889,456                        30,000             (S)   30,000                                                                    889456

            Retained earnings                         870,000                    218,000             (S) 218,000                                   870,000

            Totals                                             2,495,000                      411,000                                                                                               2,894,200

Note: The accounts of NewTune have already been adjusted for the first three journal entries indicated in the answer to Part b. to record the acquisition fair value and the stock issuance costs.

The consolidation entries are designed to:

• Eliminate the stockholders’ equity accounts of the subsidiary (S)
• Record all subsidiary assets and liabilities at fair value (A)
• Recognize the goodwill indicated by the acquisition fair value (A)
• Eliminate the Investment in On-the-Go account (S, A)