In: Accounting
On December 31, Pacifica, Inc., acquired 100 percent of the voting stock of Seguros Company. Pacifica will maintain Seguros as a wholly owned subsidiary with its own legal and accounting identity. The consideration transferred to the owner of Seguros included 50,000 newly issued Pacifica common shares ($20 market value, $5 par value) and an agreement to pay an additional $130,000 cash if Seguros meets certain project completion goals by December 31 of the following year. Pacifica estimates a 50 percent probability that Seguros will be successful in meeting these goals and uses a 4 percent discount rate to represent the time value of money.
Immediately prior to the acquisition, the following data for both firms were available:
| Seguros Company outstanding voting shares | ||||
| acquired by Pacifica Inc. | 100% | |||
| Pacifica Company's $5 par common stock issued | ||||
| for acquisition - number of shares | 50,000 | |||
| Market value of Pacifica stock at acquisition date | $ 20 | |||
| Cash paid by Pacifica when Seguros meets certain goals | $ 130,000 | |||
| Fair value of Seguros R & D project | $ 100,000 | |||
| Probability that Seguros will meet goals | 50% | |||
| Discount rate used to represent time value of money | 4% | |||
| Legal fees paid by Pacifica in connection with acquisition | $ 15,000 | |||
| Stock issuance costs paid by Pacifica | $ 9,000 | |||
| Seguros Company | ||||
| Book | Fair | |||
| Pacifica, Inc. | Values | Values | ||
| Revenues | $ (1,200,000) | |||
| Expenses | 875,000 | |||
| Net income | $ (325,000) | |||
| Retained earnings, 1/1 | $ (950,000) | |||
| Net income | (325,000) | |||
| Dividends paid | 90,000 | |||
| Retained earnings, 12/31 | $ (1,185,000) | |||
| Cash | $ 110,000 | $ 85,000 | $ 85,000 | |
| Receivables and inventory | 750,000 | 190,000 | 180,000 | |
| Property, plant, and equipment | 1,400,000 | 450,000 | 600,000 | |
| Trademarks | 300,000 | 160,000 | 200,000 | |
| Total assets | $ 2,560,000 | $ 885,000 | ||
| Liabilities | $ (500,000) | $ (180,000) | $ (180,000) | |
| Common stock | (400,000) | (200,000) | ||
| Additional paid-in capital | (475,000) | (70,000) | ||
| Retained earnings | (1,185,000) | (435,000) | ||
| Total liabilities and equities | $ (2,560,000) | $ (885,000) | ||
a.
Entry to record the acquisition on Pacifica’s records.
Investment in Seguros 1,062,500
Common Stock (50,000 × $5) 250,000
Additional Paid-In Capital (50,000 × $15) 750,000
Contingent performance obligation 62,500
The contingent consideration is computed as:$130,000 payment × 50% probability × 0.961538 present value factor
Combination expenses 15,000
Cash 15,000
APIC 9,000
Cash 9,000
b. and c.
| 
 Pacifica  | 
 Seguros  | 
 Consolidation Entries  | 
 Consolidated Balance Sheet  | 
||
| 
 Revenues  | 
 (1,200,000)  | 
 (1,200,000)  | 
|||
| 
 Expenses  | 
 890,000  | 
 890,000  | 
|||
| 
 Net income  | 
 (310,000)  | 
 (310,000)  | 
|||
| 
 Retained earnings, 1/1  | 
 (950,000)  | 
 (950,000)  | 
|||
| 
 Net income  | 
 (310,000)  | 
 (310,000)  | 
|||
| 
 Dividends paid  | 
 90,000  | 
 90,000  | 
|||
| 
 Retained earnings, 12/31  | 
 (1,170,000)  | 
 (1,170,000)  | 
|||
| 
 Cash  | 
 86,000  | 
 85,000  | 
 171,000  | 
||
| 
 Receivables and inventory  | 
 750,000  | 
 190,000  | 
 (A)10,000  | 
 930,000  | 
|
| 
 Property, plant and equip.  | 
 1,400,000  | 
 450,000  | 
 (A)150,000  | 
 2,000,000  | 
|
| 
 Investment in Seguros  | 
 1,062,500  | 
 (S) 705,000  | 
 0  | 
||
| 
 (A) 357,500  | 
|||||
| 
 R&D asset  | 
 (A)100,000  | 
 100,000  | 
|||
| 
 Goodwill  | 
 (A)77,500  | 
 77,500  | 
|||
| 
 Trademarks  | 
 300,000  | 
 160,000  | 
 (A)40,000  | 
 500,000  | 
|
| 
 Total assets  | 
 3,598,500  | 
 885,000  | 
 3,778,500  | 
||
| 
 Liabilities  | 
 (500,000)  | 
 (180,000)  | 
 (680,000)  | 
||
| 
 Contingent obligation  | 
 (62,500)  | 
 (62,500)  | 
|||
| 
 Common stock  | 
 (650,000)  | 
 (200,000)  | 
 (S) 200,000  | 
 (650,000)  | 
| 
 Additional paid-in capital  | 
 (1,216,000)  | 
 (70,000)  | 
 (S)70,000  | 
 (1,216,000)  | 
|
| 
 Retained earnings  | 
 (1,170,000)  | 
 (435,000)  | 
 (S) 435,000  | 
 (1,170,000)  | 
|
| 
 Total liabilities and equities  | 
 (3,598,500)  | 
 (885,000)  | 
 (3,778,500)  |