Question

Assume that the parent company acquires its subsidiary by exchanging 75,400 shares of its Common Stock, with a fair value on the acquisition date of $30 per share, for all of the outstanding voting shares of the investee. In its analysis of the investee company, the parent values all of the subsidiary’s assets and liabilities at an amount equaling their book values except for a building that is undervalued by $480,000, an unrecorded License Agreement with a fair value of $230,000, and an unrecorded Customer List owned by the subsidiary with a fair value of $120,000. Any further discrepancy between the purchase price and the book value of the subsidiary’s Stockholders’ Equity is attributed to expected synergies to be realized by the consolidated company as a result of the acquisition.

a. Given the following acquisition-date balance sheets of the parent and subsidiary, at what amounts will each of the following be reported on the consolidated balance sheet? (see table numbered 1-7 to answer)

Balance Sheet	Parent	Subsidiary
Assets
Cash	$728,400	$181,440
Accounts receivable	307,200	375,840
Inventory	465,600	482,760
Equity investment	2,262,000
Property, plant and equipment (PPE), net	2,000,000	893,160
	$5,763,200	$1,933,200
Liabilities and stockholders’ equity
Accounts payable	$150,480	$114,300
Accrued liabilities	176,640	198,900
Long-term liabilities	1,062,320	540,000
Common stock	176,000	108,000
APIC	2,992,000	135,000
Retained earnings	1,205,760	837,000
	$5,763,200	$1,933,200

1.	Accounts Receivable	$Answer
2.	Equity Investment	$Answer
3.	PPE, net	$Answer
4.	Goodwill	$Answer
5.	Common Stock	$Answer
6.	APIC	$Answer
7.	Retained Earnings	$Answer

b. What intangible assets will be reported on the consolidated balance sheet and at what amounts?

License Agreement	$Answer
Customer List	$Answer
Goodwill	$Answer

Answer 1

a.
		Parent			subsidiary			Consolidated
		Book	New issue	Total	Book value	Addition	Total
1	Accounts Receivable	728400		728400	181440		181440	909840
2	Equity Unvestment	0		0	0		0	0
3	PPE, net	2000000		2000000	893160	480000	1373160	3373160
4	Goodwill	352000		352000	0		0	352000
5	Common Stock	176000	754000	930000	0	0	0	930000
6	APIC	2992000	1508000	4500000	0	0	0	4500000
7	Retained Earnings	1205760		1205760	837000		837000	2042760
	Common stock of parent is considered to be consisting of $10 par shares.
	New issue of 75,400 shares will be accounted at $754,000 towards common stock and 75,400 x $20 = $1,508,000 towards
	APIC.
b.
	Licensing Agreement	230000
	Customer List	120000
	Goodwill	352000

Working:

Price paid	2262000
(75,400 x $30)
Net assets acquired
Cash	181440
Accounts Receivable	375840
Inventory	482760
PPE	893160
Accounts Payable	-114300
Accrued liabilities	-198900
Long-term liabilities	-540000
Excess of fair value for building	480000
Fair value of licensing agreement	230000
Unrecorded customer list	120000
Net asets acquired	1910000
Goodwill on acquisition	352000