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) |