Question

In: Accounting

Assignment Option #2: Acquisitions with Ownership < 100% and BV < FMV Using the data in...

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.

Big Company Balance Sheet

Which accounting method is most appropriate for representing an investment of this type?

Prepare Elimination Entries for Stock Acquisition

Assets, Liabilities & Equities

Book Value

Account

DR

CR

Cash

$2,100,000

AR

$10,000

Inventory

$200,000

Land

$40,000

PP&E

$400,000

Accumulated Depreciation

-$150,000

Patent

$0

Total Assets

$2,600,000

Prepare the journal entries for a 80% Asset Acquisition (using Big Company Cash)

AP

$100,000

Common Stock ($10 par)

$450,000

Account

DR

CR

Additional Paid In Capital

$600,000

Retained Earnings

$1,450,000

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)

Little Company Balance Sheet

Assets, Liabilities & Equities

Assets, Liabilities & Equities

Book Value

Account

DR

CR

Cash

Cash

$35,000

Investment in Little

AR

AR

$10,000

Common Stock

Inventory

Inventory

$65,000

Additional Paid In Capital

Land

Land

$40,000

Allocation of Excess Schedule

PP&E (net)

PP&E

$400,000

Accumulated Depreciation

Accumulated Depreciation

-$150,000

Goodwill

Patent

$0

Patent

Total Assets

$400,000

Total Assets

AP

$100,000

AP

Common Stock

$100,000

Common Stock ($10 par)

Additional Paid In Capital

$50,000

Additional Paid In Capital

Retained Earnings

$150,000

Retained Earnings

Total Liabilities & Equity

$400,000

NCI

Total Liabilities & Equity

Assume that all noncash assets have a Fair Value that is 10% greater than Book Value

Solutions

Expert Solution

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

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