Question

On January 1, 2015, NewTune Company exchanges 15,000 shares of its common stock for all of the outstanding shares of On-the-Go, Inc. Each of NewTune’s shares has a $4 par value and a $50 fair value. The fair value of the stock exchanged in the acquisition was considered equal to On-the-Go’s fair value. NewTune also paid $25,000 in stock registration and issuance costs in connection with the merger.

Several of On-the-Go’s accounts’ fair values differ from their book values on this date:

	Book Values	Fair Values
Receivables?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$ 65,000	$ 63,000
Trademarks?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	95,000	225,000
Record music catalog??. . . . . . . . . . . . . . . . . . . . . . . . .	60,000	180,000
In-process research and development . . . . . . . . . . . . .	–0–	200,000
Notes payable? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(50,000)	(45,000)

Precombination January 1, 2015, book values for the two companies are as follows:

	NewTune	On-the-Go
Cash? . . . . . . . . . . . . . . . . . . . . . . . .	$     60,000	$   29,000
Receivables?? . . . . . . . . . . . . . . . . . .	150,000	65,000
Trademarks.? . . . . . . . . . . . . . . . . . .	400,000	95,000
Record music catalog . . . . . . . . . . .	840,000	60,000
Equipment (net). . . . . . . . . . . . . . . .	320,000	105,000
Totals . . . . . . . . . . . . . . . . . . . . . . . .	$ 1,770,000	$ 354,000
Accounts payable. . . . . . . . . . . . . . .	$  (110,000)	$  (34,000)
Notes payable. . . . . . . . . . . . . . . . . .	(370,000)	(50,000)
Common stock. .? . . . . . . . . . . . . . . .	(400,000)	(50,000)
Additional paid-in capital? . . . . . . . .	(30,000)	(30,000)
Retained earnings. . . . . . . . . . . . . . .	(860,000)	(190,000)
Totals . . . . . . . . . . . . . . . . . . . . . . . .	$(1,770,000)	$(354,000)

a.Assume that this combination is a statutory merger so that On-the-Go’s accounts will be transferred to the records of NewTune. On-the-Go will be dissolved and will no longer exist as a legal entity. Prepare a postcombination balance sheet for NewTune as of the acquisition date.

b.Assume that no dissolution takes place in connection with this combination. Rather, both companies retain their separate legal identities. Prepare a worksheet to consolidate the two companies as of the combination date.

c.How do the balance sheet accounts compare across parts (a) and (b)?

Answer 1

a. Post-Combination Balance Sheet:
Assets	Amount	Liabilities and Owners’ Equity	Amount
Cash ($60000+($29000-$25000)	$64,000	Accounts Payable (110000+34000)	$144,000
Receivables $150000+63000)	$213,000	Notes Payable (370000+45000)	$415,000
Trademarks (400000+225000)	$625,000	Common stock (400,000+60000)	$460,000
Record Music Catalog (840000+180000)	$1,020,000	Additional paid?in capital (30000+690000-25000)	$695,000
Capitalized R&D	$200,000	Retained Earnings	$860,000
Equipment (320000+105000)	$425,000
Goodwill	$27,000
Total	$2,574,000	Total	$2,574,000

W/Note-1: Calculation of Goodwill
Fair value of consideration transferred (shares issued) (15000shares x $50)		$750,000
Cash	$29,000
Receivables	$63,000
Trademarks	$225,000
Record music catalog	$180,000
In-process R&D	$200,000
Equipment	$105,000
Accounts payable	($34,000)
Notes payable	($45,000)	$723,000
Goodwill		($27,000)

Entry by NewTune to record combination with On-the-Go:
Cash	$29,000
Receivables	$63,000
Trademarks	$225,000
Record Music Catalog	$180,000
Capitalized R&D	$200,000
Equipment	$105,000
Goodwill	$27,000
Accounts Payable		$34,000
Notes Payable		$45,000
Common Stock (NewTune par value) 15000 shares x $4		$60,000
Additional Paid?in Capital (15000x ($50 -$4)		$690,000
(To record merger with On-the-Go at fair value)
Additional Paid?in Capital	$25,000
Cash		$25,000
(Stock issue costs incurred)

Consolidated WorkSheet
							Consolidation Entries		Consolidated
	NewTune, Inc.			On-the-Go Co.			Debit	Credit	Totals
Cash		$35,000			$29,000				$64,000
Receivables		$150,000			$65,000			$2,000	$213,000
Investment in On-the-Go		$750,000						$750,000	$0
									$0
Trademarks		$400,000			$95,000		$130,000		$625,000
Record music catalog		$840,000			$60,000		$120,000		$1,020,000
Research & Development Asset					$200,000				$200,000
Equipment		$320,000			$105,000	-			$425,000
Goodwill							$27,000		$27,000
Totals		$2,495,000			$554,000				$2,574,000
Accounts payable		$110,000			$34,000		-	-	$144,000
Notes payable		$370,000			$50,000		$5,000		$415,000
Common stock		$460,000			$50,000		$50,000	-	$460,000
Additional paid-in capital	***	$695,000			$30,000		$30,000	-	$695,000
Retained earnings		$860,000			$190,000		$190,000	-	$860,000
Totals		$2,495,000			$354,000				$2,574,000

*** ( $690000+$30000-$25000)=695000