Question

Pappy Corp and Sonny, Inc. have entered into negotiations leading to a possible business combination. As of December 31, 2017, Sonny, Inc. condensed balance sheet was as follows:

Assets

Cash 375,000

Receivables (net) 1,125,000

Inventories 1,687,500

Prepayments 675,000

Noncurrent assets 3,375,000

Total assets 7,237,500

Liabilities and stockholders' equity

Current payables 3,000,000

Capital stock; (par value of 20) 1,000,000

Retained earnings 3,237,500

Total equities 7,237,500

Sonny, Inc.'s inventory has a fair value of $2,092,500, its noncurrent assets, net of depreciation, approximated $3,847,500, its current payables were valued at $3,225,000. Initially, Pappy Corp offered to acquire all of Sonny, Inc.'s stock for $4,347,500. However, 25% of Sonny, Inc.'s stockholders objected, because they felt that the purchase price should reflect about $240,000 of goodwill. Ultimately, Pappy Corp acquired 75% of Sonny, Inc.'s outstanding stock for $100 per share.

After the acquisition was completed on Dec 31, 2017, the following balance sheet was prepared for Pappy Corp:

Assets

Cash 937,500

Receivables (net) 1,500,000

Inventories 1,687,500

Prepayments 1,125,000

Investment in securities 3,750,000

Noncurrent assets 30,000,000

Total assets 39,000,000

Liabilities and stockholders' equity

Current payables 15,000,000

Capital stock; (par value of 15) 7,500,000

Retained earnings 16,500,000

Total equities 39,000,000

	FMV	BV	FMV-BV
Cash	$        375,000	$         375,000	$0
Receivables (net)	1,125,000	1,125,000	-
Inventories	$    2,092,500	1,687,500	405,000
Prepayments	$        675,000	675,000	-
Noncurrent assets	$    3,847,500	3,375,000	472,500
Current payables	(3,225,000)	(3,000,000)	(225,000)

1. Prepare the consolidated balance sheet working paper and the formal consolidated balance sheet

Answer 1

Goodwill Calculation:

	Goodwill Calculation
	Particulars	Amount ($)
	Purchase Consideration	3750000
	Non-Controlling Interest	1,146,875
	Total	4896875
	FV of Net Assets(75%)	4890000
	Goodwill	6875
	Non-Controlling Interest
	Total Value (100%)	4347500
	25% Value	1086875
	Add: Goodwill	60000
	(240000*25%
	FV of Non-Controlling Interest	1146875
			Goodwill Calculation Particulars Amount ($) Purchase Consideration 3750000 Non-Controlling Interest 1,146,875 Total 4896875 FV of Net Assets(75%) 4890000 Goodwill 6875 Non-Controlling Interest Total Value (100%) 4347500 25% Value 1086875 Add: Goodwill 60000 (240000*25% FV of Non-Controlling Interest 1146875

Consolidated Balance Sheet:

Particulars	Pappy	Sonny	FV Adjustments	Consolidated Adjustments	Final Amount in Consolidated Balance Sheet
Cash	937,500	375000			1,312,500
Receivables	1500000	1125000			2,625,000
Inventories	1687500	1687500	405000		3,780,000
Prepaymentts	1125000	675000			1,800,000
Investment in Securities	3750000			-3750000	0
					0
Non-Current Assets	30000000	3375000	472500		33,847,500
Goodwill				6875	6,875
					0
Total Assets	39000000	7237500	877500	-3743125	43,371,875
					0
					0
Current Payables	15000000	3000000	225000		18,225,000
					0
Net Assets	24000000	4237500	652500	-3743125	25,146,875
					0
Capital Stocks	7500000				7,500,000
Retained Earnings	16500000				16,500,000
Non-controlling Interest					1,146,875
					0
					0
Total					25,146,875