Question

In: Accounting

Consolidation of an International Subsidiary at Date of Acquisition Fairview Corporation, a U.S. company, has a...

Consolidation of an International Subsidiary at Date of Acquisition

Fairview Corporation, a U.S. company, has a wholly-owned subsidiary in Mexico. The subsidary's functional currency is the Mexican peso, and translation to U.S. dollars is appropriate. The subsidiary was acquired for $10,800,000. The balance sheet of the subsidiary on the date of acquisition is as follows:

Mexican Subsidiary
Balance Sheet at Date of Acquisition
Assets
Cash and receivables P9,000,000
Inventories 21,000,000
Noncurrent assets, net 45,000,000
Total assets P75,000,000
Liabilities and stockholders' equity
Liabilities P15,000,000
Capital stock 48,000,000
Retained earnings 12,000,000
Total liabilities and stockholders' equity P75,000,000

The fair values of the subsidiary's inventories are P30,000,000, and the fair values of the subsidiary's noncurrent assets are 42,000,000. All other amounts are reported at approximate fair value. The exchange rate at the date of acquisition is $0.10/peso.

Present a schedule showing the calculation of goodwill for the acquisition, in U.S. dollars, and the entries necessary to consolidate the balance sheets of Fairview and its subsidiary at the date of acquisition.

Instructions:

  • Enter all your answers below in thousands. For example, P108,000,000 equals P108,000 in thousands.
  • Do not use negative signs with any of your answers below.
Calculation of goodwill (in thousands)
P $/P U.S.$
Price Paid Answer Answer Answer
Book value Answer Answer Answer
Undervaluation of inventories Answer Answer Answer
Overvaluationof noncurrent assets Answer Answer Answer
Goodwill Answer Answer

Enter answers in thousands.

ConsolidationJournal
Description Debit Credit
(E)
AnswerInvestment in subsidiaryInventoriesCapital stockCash Answer Answer
Retained earnings Answer Answer
AnswerCashCapital stockInvestment in subsidiaryInventories Answer Answer
(R)
AnswerInventoriesCashCapital stockInvestment in subsidiary Answer Answer
Goodwill Answer Answer
Noncurrent Assets Answer Answer
AnswerCapital stockCashInvestment in subsidiaryInventories Answer Answer

Solutions

Expert Solution

Calculation of goodwill (in thousands)
P $/P U.S.$
Price Paid PESO 108,000 $0.10/peso $10,800
Book value PESO 60,000 $0.10/peso $ 6,000
Undervaluation of inventories PESO 9,000 $0.10/peso $ 900
Over valuation of non-current assets PESO 3,000 $0.10/peso $ 300
Goodwill PESO 42,000
$0.10/peso
$ 4200
Schedule showing the calculation of goodwill for the acquisition, in U.S. dollars
PRICE PAID $10,800
LESS :- NET BOOK VALUE OF SUBSIDIARY $ 6,000
CAPITAL STOCK $ 4,800
RETAINED EARNINGS $ 1,200
EXCESS PRICE PAID $ 4,800
($ 10,800 - $ 6,000)
LESS :- FAIR VALUE ADJUSTMENTS OF ASSETS PF SUBSIDIARY COMPANY $ 600
INVENTORY (UNDERVALUED)                   + $ 900
NON CURRENT ASSETS (OVERVALUED) - $ 300
GOODWILL = $ 4200 (EXCESS PRICE PAID - FAIR VALUE ADJUSTMENTS)

Enter answers in thousands.

Consolidation Journal
CAPITAL STOCK $4,800
RETAINED EARNINGS $1,200
INVENTORY $ 900
GOODWILL $4,200
TO INVESTMENT IN SUBSIDIARY $10,800
TO NON CURRENT ASSETS $ 300

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