Question

In: Accounting

On Dec 31, 2018, the balance sheets of Paper Inc. and Scissors Inc. were as follows:...

On Dec 31, 2018, the balance sheets of Paper Inc. and Scissors Inc. were as follows:

Paper Inc

Scissors Inc

Cash and Short-Term Securities

$400,000

$ 25,000

Inventory

$ 50,000

$ 10,000

Plant and Equipment (net)

$300,000

$120,000

Total Assets

$750,000

$155,000

Current Liabilities

$ 75,000

$ 20,000

Bonds Payable

$100,000

$ 30,000

Common Shares

$150,000

$ 55,000

Retained Earnings

$425,000

$ 50,000

Total Liabilities and Equity

$750,000

$155,000



On that date, the fair values of Scissors's Assets and Liabilities were as follows:

Cash & Short-Term Securities

$ 32,000

Inventory

$ 11,000

Plant and Equipment (net)

$140,000

Current Liabilities

$ 15,000

Bonds Payable

$ 28,000



On Jan 1, 2019, Paper issued 6,000 new common shares with a market value of $42.00 per share as consideration for Scissors's net assets. Prior to the issue, Paper had 10,000 outstanding common shares.

Required:

a) Assume Paper paid $252,000 in cash as consideration for Scissors's net assets. Prepare Paper's Balance Sheet immediately following its acquisition of Scissors's net assets.

b) Assume Paper decided to purchase 100% of the voting shares of Scissors Inc. for $252,000 in Cash on Jan 1, 2019.

i. Prepare the journal entry to record Paper's acquisition of Scissors's shares.

ii. Prepare Paper's Consolidated Balance Sheet immediately following its acquisition of Scissors's shares.

Solutions

Expert Solution

Answer 1.

-----Calculating Net Assets and Consideration

Statement of Net Assets
Particulars Amount
Cash and Short-Term Securities     32,000.00
Add:Inventory     11,000.00
Add:Plant and Equipment (net) 1,40,000.00
Less:Current Liabilities     15,000.00
Less:Bonds Payable     28,000.00
Net Assets 1,40,000.00
Consideration 2,52,000.00
Goodwill (252000-140000) 1,12,000.00

-----Face Value of Shares of Paper Inc = 150000/10000 =15

---- Consolidated Balance Sheet of Paper Inc

Consolidated Balance sheet
Particulars Amount
Cash and Short-Term Securities    1,80,000.00
Inventory       61,000.00
Plant and Equipment (net)    5,40,000.00
Goodwill    1,12,000.00
Total Assets    8,93,000.00
Current Liabilities    1,00,000.00
Bonds Payable    1,28,000.00
Common Shares    2,40,000.00
Retained Earnings    4,25,000.00
Total Liabilities and Equity    8,93,000.00

Answer 2

--- Journal Entry would be

Dr Investment in Scissors Inc. 252000

Cr. Cash & Short Term Securities 252000

(being 100% voting power acquired in Scissors Inc.)

---Consilidated Balance Sheet

Consolidated Balance sheet
Particulars Amount
Cash and Short-Term Securities    1,48,000.00
Inventory       50,000.00
Plant and Equipment (net)    3,00,000.00
Investment in Scissors Inc,.    2,52,000.00
Total Assets    7,50,000.00
Current Liabilities       75,000.00
Bonds Payable    1,00,000.00
Common Shares    1,50,000.00
Retained Earnings    4,25,000.00
Total Liabilities and Equity    7,50,000.00

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