Question

Graham Inc. acquired all of the outstanding shares of Mahoney Inc. through an exchange of common shares. The aggregate fair value of the Graham shares distributed to the Mahoney shareholders was $200,000. Further, at the time of the exchange, the fair value of Mahoney’s net assets was equal to their book value, except for Mahoney’s property and equipment, which was appraised at $270,000. Presented below are the pre-acquisition balance sheets of the two companies:

Pre-acquisition Balance Sheets			Graham Inc.	Mahoney Inc.
Cash			$ 30,000	$ 5,000
Accounts receivable (net)			70,000	40,000
Inventory (FIFO)			110,000	60,000
Property and equipment (net)			400,000	250,000
Other assets			20,000	10,000
			$630,000	$365,000
Accounts payable			$ 50,000	$ 12,500
Other current liabilities			50,000	7,500
Bonds payable			120,000	175,000
Common stock (no par value)			250,000	125,000
Retained earnings			160,000	45,000
			$630,000	$365,000

Prepare the consolidated balance sheet for the new company immediately following the transaction.

Remember to use negative signs with adjustment answers, when appropriate.

	Graham Inc.	Mahoney Inc.	Adjustments	Consolidated Balances
Cash	Answer	Answer	Answer	Answer
Accounts receivable (net)	Answer	Answer	Answer	Answer
Inventory (FIFO)	Answer	Answer	Answer	Answer
Property & equipment (net)	Answer	Answer	Answer	Answer
Other assets	Answer	Answer	Answer	Answer
Investment in Mahoney Inc.	Answer	Answer	Answer	Answer
Goodwill	Answer	Answer	Answer	Answer
Total assets	Answer	Answer		Answer
Accounts payable	Answer	Answer	Answer	Answer
Other current liabilities	Answer	Answer	Answer	Answer
Bonds payable	Answer	Answer	Answer	Answer
Common stock (no par value)	Answer	Answer	Answer	Answer
Retained earnings	Answer	Answer	Answer	Answer
Total liabilities & shareholders' equity

Answer 1

In the case of full acquisition, all the assets and liabilities are taken by the acquirer company at Fair Values and any difference between the purchase consideration and the net fair value of assets and liabilities is taken to Goodwill / Retained Earnings.

In the given case,
Fair Value of Purchase Consideration = $200,000
Net Fair Value of Assets & Liabilities = Fair value of Assets (-) Fair value of Liabilities
= 5,000 + 40,000 + 60,000 + 270,000 + 10,000 - 12,500 - 7,500 - 175,000
= $190,000
Amount of Goodwill = $200,000 - $190,000 = $10,000
Investment in Mahoney = $190,000

Following Journal Entries will be required to be passed in the books of Graham Inc, :-

• Business Purchase A/c Dr. 200,000
  To Payable to Mahoney 200,000
  (Being business purchased)
• Investment in Mahoney A/c Dr. 190,000
  Goodwill Dr. 10,000
  To Business Purchase 200,000
  (Being investment and goodwill recorded upon acquisition)
• Payable to Mahoney Dr. 200,000
  To Common Stock 200,000
  (Being shares issue to Mahoney as purchase consideration)

CONSOLIDATED BALANCE SHEET

	Graham Inc.	Mahoney Inc.	Adjustments	Consolidated Balances
Cash	30,000	5,000		30,000
Accounts Receivable (net)	70,000	40,000		70,000
Inventory (FIFO)	110,000	60,000		110,000
Property & Equipment (net)	400,000	250,000		400,000
Other Assets	20,000	10,000		20,000
Investment in Mahoney Inc.	0	0	(+) 190,000	190,000
Goodwill	0	0	(+) 10000	10,000
Total Assets	630,000	365,000		830,000
Accounts Payable	50,000	12,500		50,000
Other current liabilities	50,000	7,500		50,000
Bonds Payable	120,000	175,000		120,000
Common Stock (no par value)	250,000	125,000	(+) 200,000	450,000
Retained Earnings	160,000	45,000		160,000
Total liabilities and shareholder's equity	630,000	365,000		830,000

Note: There can be another approach where instead of recording the investment, we can club the value of assets and liabilities in consolidated balances. In such a case, the Consolidated Balance Sheet will be as follows :

CONSOLIDATED BALANCE SHEET

	Graham Inc.	Mahoney Inc.	Adjustments	Consolidated Balances
Cash	30,000	5,000		35,000
Accounts Receivable (net)	70,000	40,000		110,000
Inventory (FIFO)	110,000	60,000		170,000
Property & Equipment (net)	400,000	250,000		670,000
Other Assets	20,000	10,000		30,000
Investment in Mahoney Inc.	0	0	(+) 190,000 (-) 190,000	0
Goodwill	0	0	(+) 10000	10,000
Total Assets	630,000	365,000		1,025,000
Accounts Payable	50,000	12,500		62,500
Other current liabilities	50,000	7,500		57,500
Bonds Payable	120,000	175,000		295,000
Common Stock (no par value)	250,000	125,000	(+) 200,000	450,000
Retained Earnings	160,000	45,000		160,000
Total liabilities and shareholder's equity	630,000	365,000		1,025,000