Question

In: Accounting

Collins Inc. acquired 100% of the voting common stock of Merton Inc. on January 1, 2010....

Collins Inc. acquired 100% of the voting common stock of Merton Inc. on January 1, 2010. The book value and fair value of Merton’s accounts on that date are following. Credit balances are indicated by parentheses. Collins used the equity method to account for investment.

Book Value

Fair Value

Cash receivables

140,000

140,000

Inventory

340,000

340,000

Land

440,000

480,000

Buildings (20-year useful life)

480,000

480,000

Equipment (10-year useful life)

180,000

180,000

Liabilities

(860,000)

(860,000)

Common Stock

(160,000)

APIC

(80,000)

Retained Earnings

(480,000)

1.Assume that Collins issued 24,000 shares of common stock with a $5 par value and a $42 fair value for all of the outstanding stock of Merton. In this acquisition transaction, how much goodwill should be recognized?

$720,000

$188,000

$210,000

$100,000

2.Assume Collins had Common Stock 5,000,000 and Retained Earnings 1,000,000 at

Of acquisition. What will be the consolidated Retained Earnings (as of January 1, 2010

$6,000,000

$480,000

$1,000,000

$1,480,000

3. Assume that Collins issued 24,000 shares of common stock with a $5 par value and a $42 fair value for all of the outstanding stock of Merton. At the date of acquisition, at what amount is the investment recorded on Collins’ books?

$720,000

$820,000

$1,008,000

$120,000

Solutions

Expert Solution

1.

Goodwill = Consideration received less (Net of Fair Value of Assets acquired and Liabilities Assumed)

Consideration transferred = no. of shares x fair value of shares = 24,000 x $42 = $10,08,000

Fair value of net assets acquired = cash and receivables + inventory + land + buildings + equipment

                                                    = 140,000+340,000+480,000+480,000+180,000= $1620,000

Fair value of net liabilities assumed = $860,000

Net of fair value of assets and liabilities = 1620,000 - 860,000 = $760,000

Goodwill = 1008,000 - 760,000 = $248,000

2. Collins retained earnings = $1000,000

Hence, consolidated retained earnings as on Jan 1, 2010 is $1000,000

3. Investment recorded in Colin's books = no of shares issued x fair value = 24000 x 42 = $1008,000

ekkarill92 answered 2 years ago
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