Question

Lopez Company acquires 100% of the stock of Santiago Corporation on January 1, 2016, for $2,280,000 cash. As of that date, Santiago had the following account balances:

	Book Value		Fair Value
Cash	$          220,000.00		$      220,000.00
Accounts Receivable	$          360,000.00		$      360,000.00
Inventory	$          480,000.00		$      540,000.00
Building-net (10 yr life)	$          900,000.00		$      720,000.00
Equipment-net (5 yr life)	$          600,000.00		$      750,000.00
Land	$          540,000.00		$      780,000.00
Accounts Payable	$          240,000.00		$      240,000.00
Bonds Payable ($500,000 face value)	$       1,000,000.00	(due 12/31/19)	$ 1,020,000.00
Common Stock	$          600,000.00
Additional Paid-in Capital	$          360,000.00
Retained Earnings	$          900,000.00

In 2016 and 2017, Santiago had net income of $100,000 and 108,000, respectively. In addition, Santiago paid dividends of $27,000 in both years. Inventory is assumed to be sold in 2016.

1.  What was the amount of excess of acquisition price over book value of Santiago's net assets?

2. What is the amount of goodwill at the date of acquisition?

3. What amount of inventory would be added to the parent's inventory balance to get consolidated inventory at the date of acquisition?

4. What amount of Santiago’s building would be included on the consolidated balance sheet at December 31, 2016?

5. What amount of Santiago’s equipment would be included on the consolidated balance sheet at December 31, 2016?

6. Compute the AAP amortization for 2016.

7.  What amount of Santiago's Bonds Payable would appear on the consolidated balance sheet on December 31, 2016?

8.  What amount of Santiago's building would be included on the consolidated balance sheet at December 31, 2017?

9. What amount of Santiago's equipment would be included on the consolidated balance sheet at December 31, 2017?

10. What amount of Santiago's land would be included on the consolidated balance sheet at December 31, 2017?

11. What amount of Santiago’s Bonds Payable would be included on the consolidated balance sheet at December 31, 2017?

12.  Compute the AAP amortization for 2017.

13. What amount of Santiago's stockholders' equity will be included in the consolidated balance sheet at the date of acquisition?

Answer 1

1. Book value of net assets=

Common stock	6,00,000
Paid in capital	3,60,000
Retained earnings	9,00,000
Total	18,60,000
Acquisition price	22,80,000
Excess	4,20,000

2.

Ref	Particulars	Amount
a	Fair value of entity	22,80,000
b	Total value without goodwill	21,10,000
c=a-b	Goodwill	1,70,000

On acqusition date
Value of subsidiary without goodwill
Common stock	6,00,000
Paid in capital	3,60,000
Retained earnings	9,00,000
Fair value adjustment:
Inventory	60,000
Building	-1,80,000
Equipment	1,50,000
Land	2,40,000
Bonds payable	-20,000
Total	21,10,000

Account	Book value	Fair value	Fair value adjustment
Inventory	4,80,000	5,40,000	60,000
Building	9,00,000	7,20,000	-1,80,000
Equipment	6,00,000	7,50,000	1,50,000
Land	5,40,000	7,80,000	2,40,000
Bonds payable	10,00,000	10,20,000	-20,000

3. Since inventory is assume to be sold in 2016, balance will be 0.

4. Building added:

Fair value less depreciation = 720000-720000/10 = 648000

5. Equipement added= Fair value less depreciation = 750000 -750000/5= 600000

6. bond payable premium amortisation = 20000/4= 5000

7. bond payable balance= 1020000-5000 =1015000

8. Building balance in 2017= 720000 - 720000*2/10= 576000

9. equipment balance in 2017= 750000- 750000*2/5= 450000

10. Land balance= 780000

11. bond payable balance = 1020000 - 20000*2/4= 1010000

12. bond payable amortisation = 20000/4= 5000

13. stockholders equity of santiago will be eliminated on date of acquisition, hence amount is 0.