Question

Pratt Company acquired all of Spider, Inc.’s outstanding shares on December 31, 2018, for $495,000 cash. Pratt will operate Spider as a wholly owned subsidiary with a separate legal and accounting identity. Although many of Spider’s book values approximate fair values, several of its accounts have fair values that differ from book values. In addition, Spider has internally developed assets that remain unrecorded on its books. In deriving the acquisition price, Pratt assessed Spider’s fair and book value differences as follows:

	Book Values				Fair Values
Computer software	$	20,000			$	70,000
Equipment		40,000				30,000
Client contracts		0				100,000
In-process research and development		0				40,000
Notes payable		(60,000	)			(65,000	)

At December 31, 2018, the following financial information is available for consolidation:

	Pratt				Spider
Cash	$	36,000			$	18,000
Receivables		116,000				52,000
Inventory		140,000				90,000
Investment in Spider		495,000				0
Computer software		210,000				20,000
Buildings (net)		595,000				130,000
Equipment (net)		308,000				40,000
Client contracts		0				0
Goodwill		0				0
Total assets	$	1,900,000			$	350,000
Accounts payable	$	(88,000	)		$	(25,000	)
Notes payable		(510,000	)			(60,000	)
Common stock		(380,000	)			(100,000	)
Additional paid-in capital		(170,000	)			(25,000	)
Retained earnings		(752,000	)			(140,000	)
Total liabilities and equities	$	(1,900,000	)		$	(350,000	)

Prepare a consolidated balance sheet for Pratt and Spider as of December 31, 2018.

Answer 1

	Pratt	Spider	Adjustment	Consolidation amount
Cash	36,000	18,000		54,000
Receivables	1,16,000	52,000		1,68,000
Inventory	1,40,000	90,000		2,30,000
Investment in Spider	4,95,000	-	-4,95,000	-
Computer software	2,10,000	20,000	50,000	2,80,000
Buildings (net)	5,95,000	1,30,000		7,25,000
Equipment (net)	3,08,000	40,000	-10,000	3,38,000
Client contracts	-	-	1,00,000	1,00,000
IN process RD			40,000	40,000
Goodwill	-	-	55,000	55,000
Total assets	19,00,000	3,50,000	-2,60,000	19,90,000
Liabilities & Stockholder's Equity
Accounts payable	-88,000	-25,000		-1,13,000
Notes payable	-5,10,000	-60,000	-5,000	-5,75,000
Common stock	-3,80,000	-1,00,000	1,00,000	-3,80,000
Additional paid-in capital	-1,70,000	-25,000	25,000	-1,70,000
Retained earnings	-7,52,000	-1,40,000	1,40,000	-7,52,000
Total liabilities & stockholder's equity	-19,00,000	-3,50,000	2,60,000	-19,90,000

Worksheet entry:

Account	Debit	Credit
Common stock	1,00,000
Paid in capital	25,000
Retained earnings	1,40,000
Investment in stanford		4,95,000
Computer software	50,000	-
Equipment	-	10,000
Clent contracts	1,00,000	-
In process RD	40,000	-
Notes payable	-	5,000
Goodwill	55,000
Non controlling interest		-

Goodwill calculation:

Ref	Particulars	Amount
a	Fair value of entity	4,95,000
b	Total value without goodwill	4,40,000
c=a-b	Goodwill	55,000

On acqusition date
Value of subsidiary without goodwill
Common stock	1,00,000
Paid in capital	25,000
Retained earnings	1,40,000
Fair value adjustment:
Computer software	50,000
Equipment	-10,000
Clent contracts	1,00,000
In process RD	40,000
Notes payable	-5,000
Total	4,40,000

Fair value adjustment
Account	Book value	Fair value	Fair value adjustment
Computer software	20,000	70,000	50,000
Equipment	40,000	30,000	-10,000
Clent contracts	-	1,00,000	1,00,000
In process RD	-	40,000	40,000
Notes payable	-60,000	-65,000	-5,000