Question

On January 1, NewTune Company exchanges 15,000 shares of its common stock for all of the out-
standing 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.
New Tune also paid $25,000 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,000 $ 63,000
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,000 225,000
Record music catalog . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 180,000
In-process research and development . . . . . . . . . . –0– 200,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50,000) (45,000)
Precombination book values for the two companies are as follows:

NewTune On-the-Go
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,000 $ 29,000
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 65,000
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 95,000
Record music catalog . . . . . . . . . . . . . . . . . . . . . . . . . 840,000 60,000
Equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320,000 105,000
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,770,000 $354,000

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (110,000) $ (34,000)
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (370,000) (50,000)
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (400,000) (50,000)
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . (30,000) (30,000)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . (860,000) (190,000)
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,770,000)   $(354,000)

a. 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.

b. Assume that no dissolution takes place in connection with this combination. Rather, both com-
panies retain their separate legal identities. Prepare a worksheet to consolidate the two compa-
nies as of the combination date.

c. How do the balance sheet accounts compare across parts (a) and (b)?

Answer 1

a.

Fair value of consideration transferred		750000
15000 shares @ 50 each
fair value of assets acquired
receivables	63000
trademarks	225000
record music catalog	180000
in process R&D	200000
cash	29000
equipment	105000
notes payable	-45000
accounts payable	-34000	723000
Goodwill		27000

workings:

Common stock = 15000*4=60000

Additional paid in capital= 750000-60000

= $ 690000

Consolidated Balance sheet
Liabilities	Amount	Assets	Amount
Common Stock	460000	cash (60000+ 29000)	89000
Additional paid in capital	720000	receivables (150000+ 63000)	213000
Retained earnings	860000	trademarks(400000+225000	625000
Notes payable (370000+45000)	415000	record music catalog (840000+180000)	1020000
Accounts payable (110000+34000)	144000	equipment (320000+ 105000)	425000
		in process R & D	200000
		Goodwill	27000
	2599000		2599000

b.

			Consolidation entries
	Neptune	On the go	Debit	Credit	Consolidated Amount
Assets
cash	60000	29000			89000
receivables	150000	65000		2000	213000
trademarks	400000	95000	130000		625000
record music catalog	840000	60000	120000		1020000
equipment	320000	105000			425000
In Process R & D			200000		200000
Goodwill			27000		27000
	1770000	354000			2599000
Liabilities
accounts payable	110000	34000			144000
notes payable	370000	50000	5000		415000
common stock	400000	50000	50000	60000	460000
additional paid in capital	30000	30000	30000	690000	720000
retained earnings	860000	190000	190000		860000
	1770000	354000			2599000

c. Balances of neptune and on the go has been separately disclosed in option b