Question

On December 31, 2014, 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 62,110 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, 2015. 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:

	Pacifica				Seguros Book Values			Seguros Fair Values
Revenues	$	(1,490,000	)
Expenses		1,043,000
Net income	$	(447,000	)
Retained earnings, 1/1/14	$	(1,040,000	)
Net income		(447,000	)
Dividends declared		132,000
Retained earnings, 12/31/14	$	(1,355,000	)
Cash	$	114,000			$	113,000		$	113,000
Receivables and inventory		479,000				149,000			136,000
Property, plant, and equipment		1,830,000				478,000			646,500
Trademarks		361,000				225,000			278,200
Total assets	$	2,784,000			$	965,000
Liabilities	$	(554,000	)		$	(186,000	)	$	(186,000	)
Common stock		(400,000	)			(200,000	)
Additional paid-in capital		(475,000	)			(70,000	)
Retained earnings		(1,355,000	)			(509,000	)
Total liabilities and equities	$	(2,784,000	)		$	(965,000	)

Note: Parentheses indicate a credit balance.

In addition, Pacifica assessed a research and development project under way at Seguros to have a fair value of $193,000. Although not yet recorded on its books, Pacifica paid legal fees of $21,400 in connection with the acquisition and $11,100 in stock issue costs.

a.

Prepare Pacifica’s entries to account for the consideration transferred to the former owners of Seguros, the direct combination costs, and the stock issue and registration costs. (Use a 0.961538 present value factor where applicable.) (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Record the acquisition of Seguros Company.

Record the legal fees related to the combination.

Record the payment of stock issuance costs.

	Transaction General Journal Debit Credit 3

Answer 1

Part A

Account titles and explanation	debit	credit
Investment in Seguros	1192500
Common Stock (56500 × $5)		282500
Additional Paid-In Capital (56500 × $15)		847500
Contingent performance obligation (130000*50%*0.961538)		62500
(to record the acquisition on Pacifica’s records)
Professional Services Expense	24600
Cash		24600
Additional Paid-In Capital	11700
Cash		11700

Pacifica	Seguros	Consolidation Entries	Consolidated Balance Sheet
Revenues	(2110000)				(2110000)
Expenses	1477000				1477000
Net income	(633000)				(633000)
Retained earnings, 1/1	(1026000)				(1026000)
Net income	(633000)				(633000)
Dividends declared	171000				171000
Retained earnings, 12/31	(1488000)				(1488000)
Cash	125700	154000			279700
Receivables and inventory	254000	93000		19500	327500
Property, plant and equipment	2190000	487000	175500		2852500
Investment in Seguros	1228800			1228800	0
Research and development asset			157000		157000
Goodwill			146800		146800
Trademarks	353000	248000	45000		646000
Total assets	2959000	982000			(4409500)
Liabilities	(596000)	(258000)			(854000)
Contingent performance obligation	(62500)				(62500)
Common stock	(682500)	(200000)	200000		(682500)
Additional paid-in capital	(1322500)	(70000)	70000		(1322500)

Retained earnings	(1488000)	(454000)	454000		(1488000)
Total liabilities and equities	(2959000)	(982000)			(4409500)

162000-24600-11700 = 125700

93000-73500 = 19500

662500-487000 = 175500

293000-248000 = 45000

400000+282500 = 682500

475000+847500 = 1322500