In: Accounting
Assignment Option #2: Acquisitions with Ownership < 100% and BV < FMV
Using the data in the Option 2 Spreadsheet (linked at the bottom of the page), perform the accounting required for the acquisition of Little, Inc. by Big, Inc. This is an 80% acquisition, where the book value of the assets acquired is less than the acquisition price. Within the worksheet, you are to:
Select an accounting method (either cost or equity) and explain why you selected this method
Perform the required journal entries
Complete the consolidation worksheet
Prepare the consolidated balance sheet in good form
Assume that Big Company decides to acquire 80% Little Company for $500,000. Prepare the appropriate journal entries. |
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Big Company Balance Sheet |
Which accounting method is most appropriate for representing an investment of this type? |
Prepare Elimination Entries for Stock Acquisition |
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Assets, Liabilities & Equities |
Book Value |
Account |
DR |
CR |
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Cash |
$2,100,000 |
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AR |
$10,000 |
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Inventory |
$200,000 |
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Land |
$40,000 |
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PP&E |
$400,000 |
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Accumulated Depreciation |
-$150,000 |
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Patent |
$0 |
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Total Assets |
$2,600,000 |
Prepare the journal entries for a 80% Asset Acquisition (using Big Company Cash) |
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AP |
$100,000 |
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Common Stock ($10 par) |
$450,000 |
Account |
DR |
CR |
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Additional Paid In Capital |
$600,000 |
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Retained Earnings |
$1,450,000 |
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Total Liabilities & Equity |
$2,600,000 |
Prepare the journal entries for a 80% Acquisition by issuing 10,000 shares of Big Company Stock |
Big Company Balance Sheet (Consolidated) |
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Little Company Balance Sheet |
Assets, Liabilities & Equities |
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Assets, Liabilities & Equities |
Book Value |
Account |
DR |
CR |
Cash |
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Cash |
$35,000 |
Investment in Little |
AR |
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AR |
$10,000 |
Common Stock |
Inventory |
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Inventory |
$65,000 |
Additional Paid In Capital |
Land |
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Land |
$40,000 |
Allocation of Excess Schedule |
PP&E (net) |
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PP&E |
$400,000 |
Accumulated Depreciation |
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Accumulated Depreciation |
-$150,000 |
Goodwill |
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Patent |
$0 |
Patent |
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Total Assets |
$400,000 |
Total Assets |
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AP |
$100,000 |
AP |
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Common Stock |
$100,000 |
Common Stock ($10 par) |
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Additional Paid In Capital |
$50,000 |
Additional Paid In Capital |
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Retained Earnings |
$150,000 |
Retained Earnings |
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Total Liabilities & Equity |
$400,000 |
NCI |
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Total Liabilities & Equity |
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Assume that all noncash assets have a Fair Value that is 10% greater than Book Value |
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1.
For this kind of acquision, the cost accounting method is used. The cost net purcahse method of accounting will be use as target company is acquired with 80% of its value.
Adjusted bookvale method is appropriate for this type of investment.
2. Investment in Sibsidary $500,000
To cash $500,000
3.
Prepare the jornal entries for 80% acquision by issuing 10,000 shares of Big Company stock | ||||||
Account | Dr | Cr | ||||
Investment in Little | $500,000 | |||||
Common stock | $100,000 | |||||
Additional paid in capital | $400,000 | |||||
Elimination entry
Common stock | $100,000 (10000 shares at $10 Face value) | |
addinal capital | $7,500 | |
Additional Capital | $392,500 | |
Investment in Little | $500,000 |
Consolidated | |
Assets, Liabilities & Equities | |
Cash | $2,135,000 |
AR | $20,000 |
Inventory | $265,000 |
Land | $80,000 |
PP&E | $800,000 |
Accumulated Depreciation | ($300,000) |
Total Assets | $3,000,000 |
AP | $200,000 |
Common Stock ($10 par) | $200,000 |
Additional capital | $400,000 |
Addional capital(Little Company) | $600,000 |
Retained earning | $1,600,000 |
Total liabilities and equity | $3,000,000 |