Question

In: Accounting

On December 31, Pacifica, Inc., acquired 100 percent of the voting stock of Seguros Company. Pacifica...

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)

Solutions

Expert Solution

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)


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