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)?

(Prepare balance sheet for a statutory merger using the acquisition method. Also, use worksheet to derive consolidated totals.)

Answer 1

Post combination Balance Sheet
Assets		Liabilities and Owners' Equity
Cash	64000	Accounts payable	144000
Receivables	213000	Notes payable	415000
Trademarks	625000	Common Stock	460000
Record music catalog	1020000	Additional paid in capital	720000
Research and development asset	200000	Retained Earnings	860000
Equipment	425000
Goodwill	52000
Total Assets	2599000	Total Liabilities and Equities	2599000
	Consolidation Worksheet
			Consolidation Entires
	Newtune Co.	On the Go Inc.	Debit	Credit	Consolidated Totals
Cash	35000	29000			64000
Receivables	150000	65000		2000	213000
Investment in On the go	775000			775000	0
Trademarks	400000	95000	130000		625000
Record music catalog	840000	60000	120000		1020000
Research and development asset	0	0	200000		200000
Equipment	320000	105000			425000
Goodwill	0	0	52000		52000
Total Assets	2520000	354000			2599000
Accounts payable	110000	34000			144000
Notes payable	370000	50000	5000		415000
Common Stock	460000	50000	50000		460000
Additional paid in capital	720000	30000	30000		720000
Retained Earnings	860000	190000	190000		860000
Total Liabilities and Equities	2520000	354000	275000	0	2599000