Question

The account balances of Delenn Company and Londo Company as of December 31 are in the accompanying Excel spreadsheet along with the fair values of Londo’s assets and liabilities.

Additional financial information:

• On December 31, Delenn issues 50,000 shares of its $20 par value common stock for all of the outstanding shares of Londo Company.
• In creating this combination, Delenn pays $10,000 in stock issue costs and $20,000 in accounting and legal fees.

Required:

1. Delenn’s stock has a fair value of $35 per share.
   1. Prepare the necessary journal entries if Delenn dissolves Londo so that Londo is no longer a separate legal entity.
   2. Assume instead that Londo will retain separate legal incorporation and maintain its own accounting system.
      1. Prepare the necessary journal entries on the acquisition date.
      2. Prepare a schedule showing the allocation of the difference between the book values and fair values of Londo’s assets and liabilities.
      3. Prepare a worksheet to consolidate the accounts of the two companies on the acquisition date, 12/31.
   3. Now assume that Delenn’s stock has a fair value of $27 per share and that Londo will retain separate legal incorporation and maintain its own accounting system.
      1. Prepare the necessary journal entries on the acquisition date

	Delenn Company Book Values	Londo Company Book Values	Londo Company Fair Values
	12/31	12/31	12/31
Cash	600,000	200,000	200,000
Receivables	900,000	300,000	290,000
Inventory	1,100,000	600,000	820,000
Building and equipment (net)	9,000,000	800,000	900,000
Unpatented technology	0	0	500,000
In-process research and development	0	0	100,000
Accounts payable	(400,000)	(200,000)	(200,000)
Notes payable	(3,400,000)	(1,100,000)	(1,100,000)
Totals	7,800,000	600,000	1,510,000
Common stock-$20 par	(2,000,000)
Common stock-$5 par		(220,000)
Additional paid-in capital	(900,000)	(100,000)
Retained earnings, 1/1	(2,300,000)	(130,000)
Revenues	(6,000,000)	(900,000)
Expenses	3,400,000	750,000
Totals	(7,800,000)	(600,000)	0

Answer 1

Calculation of Goodwill:
Purchase Consideration:
Fair value of shares issued	=50000*35	1750000
Stock issue cost		10000
Legal fees		20000
Purchase Consideration (a)		1780000
Fair value of Net Assets:
Cash		200000
Receivables		290000
Inventory		820000
Building and equipment		900000
Unpatented Technology		500000
In Process R&D		100000
-Accounts Payable		-200000
-Notes Payable		-1100000
Fair value of Net Assets (b)		1510000
Goodwill (a-b)		270000

Journal Entries in books of Delenn:
If Delenn dissolves Londo so that Londo is no longer a separate legal entity:
Cash Dr	200000
Receivables Dr	290000
Inventory Dr	820000
Building and equipment Dr	900000
Unpatented Technology Dr	500000
In Process R&D Dr	100000
Goodwill Dr	270000
To Accounts Payable		200000
To Notes Payable		1100000
To Common Stock		1000000	=50000*20
To Additional Paid in capital		750000	=50000*15
To Cash		30000	=10000+20000
If Londo will retain separate legal incorporation:
Investment in Londo Co.Dr	1510000
Goodwill Dr.	270000
To Common Stock		1000000
To Additional Paid in capital		750000
To Cash		30000

Worksheet to Consolidate the accounts:
	Delenn Company Book Values (a)	Londo Company Fair Values (b)	Consolidated Balance (a+b)
Goodwill	270000	0	270000
Cash	570000	200000	770000
Receivables	900000	290000	1190000
Inventory	1100000	820000	1920000
Building and equipment	9000000	900000	9900000
Unpatented Technology		500000	500000
In Process R&D		100000	100000
Accounts Payable	-400000	-200000	-600000
Notes Payable	-3400000	-1100000	-4500000
Totals			9550000
Common stock-$20 par	-3000000		-3000000
Additional Paid in capital	-1650000		-1650000
Retained earnings, 1/1	-2300000		-2300000
Revenues	-6000000		-6000000
Expenses	3400000		3400000
Totals			-9550000

Calculations:

	Delenn Company Book Values (a)	Londo Company Fair Values (b)
Goodwill	270000	0
Cash	=600000-30000	200000
Receivables	900000	290000
Inventory	1100000	820000
Building and equipment	9000000	900000
Unpatented Technology		500000
In Process R&D		100000
Accounts Payable	-400000	-200000
Notes Payable	-3400000	-1100000
Totals
Common stock-$20 par	=-2000000-1000000
Additional Paid in capital	=-900000-750000
Retained earnings, 1/1	-2300000
Revenues	-6000000
Expenses	3400000
Totals