Question

In: Accounting

On January 2, 2018, Acquirer Co acquires 10,000 shares (5%) of Target Inc’s shares of common...

On January 2, 2018, Acquirer Co acquires 10,000 shares (5%) of Target Inc’s shares of common stock for $42 a share. Acquirer held the Target shares until January 9, 2020 when it sells the stock for $48 a share. Target reported the following earnings/loss per share, paid the following cash dividends per share, and the trading price of each share of its common stock are as follows: Year Earnings/Loss per share 12/31/Cash Dividends per sh Fair Mkt Value 12/31 per sh 2018 $7 earnings per share $4/share $50/share 2019 $3 loss per share $2/share $44/share INSTRUCTIONS; 1a. Prepare the journal entries that Acquirer would make during 2018 and 2019 for its investment in T assuming that Acquirer’s ownership of Target was insignificant. 1b. Prepare the journal entry that Acquirer Co. would make on January 9, 2020 to record its sale of the Target stock. 2a. Prepare the journal entries that Acquirer Co. would make during 2018 and 2019 for its investment in Target assuming INSTEAD that Acquirer did not know the fair market value of the Target stock (and its ownership was insignificant.) 2b. Prepare the journal entry that Acquirer Co. would make on January 9, 2020 to record its sale of the Target stock 3a. Assume INSTEAD that Acquirer elects two directors to the board and, that on 1/9/18, Acquirer appraised the net assets of Target and determined that the fair market value of Target’s patent (which had a remaining life of 10 years) exceeded its book value by $800,000 and that all of Target’s other assets had book values equal to their fair market values. Prepare the journal entries that Acquirer Co. would make during 2018 and 2019. 3b. Prepare the journal entry that Acquirer Co. would make on January 9, 2020 to record its sale of the Target stock

Solutions

Expert Solution

1a. Prepare the journal entries that Acquirer would make during 2018 and 2019 for its investment in T assuming that Acquirer’s ownership of Target was insignificant.

Note: Since the investment is less than 20%, it is treated as insignificant and is accounted using cost method

  1. 02 Jan 2018        Investment in Shares     Dr           : $420,000

To Bank:$420,000

(Being investment made in 10000 equity shares of M/s Target at $42 per share)

  1. 31 Dec 2018        Bank                                      Dr           : $40,000

Investment income                        :               $40,000

(Being dividend received from investment in Target)

  1. 31 Dec 2018        Investment in shares     Dr                           : $80,000

Unrealised income on investment           :               $80,000

(Being investments in Target reinstated at market value of $ 50 each)

  1. 31 Dec 2019        Bank                                      Dr           : $20,000

Investment income                        :               $20,000

(Being dividend received from investment in Target)

  1. 31 Dec 2019        Unrealised loss on investment   Dr                           : $60,000

Investment in shares                                                     :               $60,000

(Being investments in Target reinstated at market value of $44 each)

1b. Prepare the journal entry that Acquirer Co. would make on January 9, 2020 to record its sale of the Target stock.

  1. 09 Jan 2020         Bank                                      Dr           :$480,000

Investment in shares                     :               $440,000

Gain on investments                      :               $40,000

                                                (Being investment in Target sold at $48 each)

2a. Prepare the journal entries that Acquirer Co. would make during 2018 and 2019 for its investment in Target assuming INSTEAD that Acquirer did not know the fair market value of the Target stock (and its ownership was insignificant.)

When market value is not available, the investment can be shown at historical cost. Below is the entry scheme.

  1. 02 Jan 2018         Investment in Shares     Dr           : $420,000

To Bank:$420,000

(Being investment made in 10000 equity shares of M/s Target at $42 per share)

  1. 31 Dec 2018        Bank                                      Dr           : $40,000

Investment income                        :               $40,000

(Being dividend received from investment in Target)

  1. 31 Dec 2019        Bank                                      Dr           : $20,000

Investment income                        :               $20,000

(Being dividend received from investment in Target)

2b. Prepare the journal entry that Acquirer Co. would make on January 9, 2020 to record its sale of the Target stock

  1. 09 Jan 2020         Bank                                      Dr           :$480,000

Investment in shares                     :               $420,000

Gain on investments                      :               $60,000

                                                (Being investment in Target sold at $48 each)

3a. Assume INSTEAD that Acquirer elects two directors to the board and, that on 1/9/18, Acquirer appraised the net assets of Target and determined that the fair market value of Target’s patent (which had a remaining life of 10 years) exceeded its book value by $800,000 and that all of Target’s other assets had book values equal to their fair market values. Prepare the journal entries that Acquirer Co. would make during 2018 and 2019.

  1. 02 Jan 2018         Investment in Shares     Dr           : $420,000

To Bank:$420,000

(Being investment made in 10000 equity shares of M/s Target at $42 per share)

  1. 31 Dec 2018        Investment in shares     Dr                           : $80,000

Unrealised income on investment           :               $80,000

(Being investments in Target reinstated for market value appraisal-10% of $800K)

  1. 31 Dec 2018        Bank                                      Dr           : $40,000

Investment income                        :               $40,000

(Being dividend received from investment in Target)

  1. 31 Dec 2018        No entry required as market value is equal to book value.
  1. 31 Dec 2019        Bank                                      Dr           : $20,000

Investment income                        :               $20,000

(Being dividend received from investment in Target)

                                                                                          

  1. 31 Dec 2019        Unrealised loss on investment   Dr                           : $60,000

Investment in shares                                                     :               $60,000

(Being investments in Target reinstated at market value of $44 each)

3b. Prepare the journal entry that Acquirer Co. would make on January 9, 2020 to record its sale of the Target stock

  1. 09 Jan 2020         Bank                                      Dr           :$480,000

Investment in shares                     :               $440,000

Gain on investments                      :               $40,000

                                                (Being investment in Target sold at $48 each)

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

Acquirer pays 1,000 for all the shares of Target Corp on Jan 2 of the current...
Acquirer pays 1,000 for all the shares of Target Corp on Jan 2 of the current year. Targets assets have a basis of 200.    a) Under what cases would acquirer want to make an election under Section 338?    b) When is the due date of the election?
Balm Co. had 10,000 shares of common stock outstanding as of January 1. The following events...
Balm Co. had 10,000 shares of common stock outstanding as of January 1. The following events occurred during the year: 4/1 Issued 3,000 shares of common stock. 7/1 Distributes 20% stock dividend 10/1 Purchases 4000 shares of stock for treasury 12/1 declares and distributes a 3 to 1 stock split. What is the weighted average number of shares to be used for computing Earnings Per Share?
On January 1st, 2018, MTU Inc. purchased 25,000 of the 100,000 common shares of Blizzard Co....
On January 1st, 2018, MTU Inc. purchased 25,000 of the 100,000 common shares of Blizzard Co. for $14 per share. Blizzard declared a dividend of $30,000 on June 30th, 2018. On Dec. 31, 2018, Blizzard reported net income of $400,000 and the fair market value of its stock at that point in time was $18 per share. Prepare all necessary journal entries relating to this investment for MTU Inc.
On January 1, 2015, Port Company acquires 8,000 shares of Solvo Company byi ssuing 10,000 of...
On January 1, 2015, Port Company acquires 8,000 shares of Solvo Company byi ssuing 10,000 of its common stock shares with a par value of $10 per share and a fair value of $70 per share. The price paid reflects a control premium. The market value of the shares owned by the NCI is $80 per share. At the time of the purchase, Solvo has the following balance sheet: PROBLEMS Assets Currentassets .............. Investments ................ Land...................... Building(net)............... Equipment(net) ............. Totalassets..................
An acquirer has an issued capital of 300 million shares trading at $6.04. A target company...
An acquirer has an issued capital of 300 million shares trading at $6.04. A target company has an issued capital of 500 million shares trading at $3.03. The acquirer expects synergies from an acquisition with a present value of $300 million and offers target company shareholders 0.5 acquirer shares for each target company share. What is the likely post-announcement price of acquirer company stock (to two decimal places)?
An acquirer has an issued capital of 300 million shares trading at $6.06. A target company...
An acquirer has an issued capital of 300 million shares trading at $6.06. A target company has an issued capital of 500 million shares trading at $2.99. The acquirer expects synergies from an acquisition with a present value of $200 million. What is the maximum exchange ratio (to two decimal places) that could be offered in a stock swap and still generate a positive-NPV for the acquirer?
An acquirer has an issued capital of 300 million shares trading at $5.96. A target company...
An acquirer has an issued capital of 300 million shares trading at $5.96. A target company has an issued capital of 500 million shares trading at $2.95. The acquirer expects synergies from an acquisition with a present value of $300 million and offers target company shareholders 0.48 acquirer shares for each target company share. What is the likely post-announcement price of acquirer company stock (to two decimal places)?
An acquirer has an issued capital of 300 million shares trading at $5.95. A target company...
An acquirer has an issued capital of 300 million shares trading at $5.95. A target company has an issued capital of 500 million shares trading at $2.78. The acquirer expects synergies from an acquisition with a present value of $200 million. What is the maximum exchange ratio (to two decimal places) that could be offered in a stock swap and still generate a positive-NPV for the acquirer?
Fox Co. bought 1,000 shares of Owl Co. common stock, after which Owl had 10,000 shares...
Fox Co. bought 1,000 shares of Owl Co. common stock, after which Owl had 10,000 shares authorized, 9,000 shares issued, and 8,000 shares outstanding. Fox expects to hold this stock for at least 9 months. When could Fox report a gain on its income statement? When Owl reports net income When Fox sells Owl common stock When Owl declares common stock dividends When the market price of Owl common stock increases
On January 1, 2018, Edward Corporation had 29,000 shares of $5 par value common stock and...
On January 1, 2018, Edward Corporation had 29,000 shares of $5 par value common stock and 29,000 shares of 7%, $100 par value convertible preferred stock outstanding. The preferred shares carried a 2-for-1 conversion privilege. On October 1, 2018, all of the preferred shares were converted to common. What number of shares must Edward use in computing basic earnings per share at December 31, 2018?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT