Question

On January 1, 2018, Marshall Company acquired 100 percent of the outstanding common stock of Tucker Company. To acquire these shares, Marshall issued $260,000 in long-term liabilities and 20,000 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Marshall paid $28,500 to accountants, lawyers, and brokers for assistance in the acquisition and another $13,500 in connection with stock issuance costs.

Prior to these transactions, the balance sheets for the two companies were as follows:

	Marshall Company Book Value				Tucker Company Book Value
Cash	$	87,900			$	30,200
Receivables		283,000				124,000
Inventory		406,000				140,000
Land		290,000				252,000
Buildings (net)		491,000				227,000
Equipment (net)		163,000				68,100
Accounts payable		(211,000	)			(42,000	)
Long-term liabilities		(488,000	)			(260,000	)
Common stock—$1 par value		(110,000	)
Common stock—$20 par value						(120,000	)
Additional paid-in capital		(360,000	)			0
Retained earnings, 1/1/18		(551,900	)			(419,300	)

Note: Parentheses indicate a credit balance.

In Marshall’s appraisal of Tucker, it deemed three accounts to be undervalued on the subsidiary’s books: Inventory by $8,100, Land by $30,000, and Buildings by $34,600. Marshall plans to maintain Tucker’s separate legal identity and to operate Tucker as a wholly owned subsidiary.

1. Determine the amounts that Marshall Company would report in its postacquisition balance sheet. In preparing the postacquisition balance sheet, any required adjustments to income accounts from the acquisition should be closed to Marshall’s retained earnings. Other accounts will also need to be added or adjusted to reflect the journal entries Marshall prepared in recording the acquisition.
2. To verify the answers found in part (a), prepare a worksheet to consolidate the balance sheets of these two companies as of January 1, 2018.

Answer 1

a. Prepare the following balance sheet:

M Inc.
Balance Sheet
January 1, 2018
Assets	Amount	Amount
Current assets:
Cash	$76,100
Receivable	$407,000
Inventory	$554,100
Total current assets		$1,037,200
Property, plant and Equipment
Land		$572,000
Buildings (net)		$752,600
Equipment (net)		$231,100
Total assets		$2,592,900
Liabilities and Stockholders Equity
Current liabilities:
Accounts payable	$253,000
Total current liabilities		$253,000
Long-term liabilities		$1,008,000
Total liabilities		$1,261,000
Stockholders Equity
Common stock - $1 par value	$130,000
Additional paid-in capital	$526,500
Retained earnings, 1/1/8	$675,400
Total stockholders' equity		$1,331,900
Total Liabilities and Stockholders Equity		$2,592,900

b. Prepare the following worksheet:

Accounts	M Inc.	T Inc	Consolidated Entries		Consolidated Totals
			Debit	Credit
Cash	$45,900	$30,200			$76,100
Receivable	$283,000	$124,000			$407,000
Inventory	$406,000	$140,000	$8,100		$554,100
Land	$290,000	$252,000	$30,000		$572,000
Buildings	$491,000	$227,000	$34,600		$752,600
Equipment	$163,000	$68,100			$231,100
Investment in T Inc	$612,000			$539,300	$0
				$72,700
Total	$2,290,900	$841,300			$2,592,900
Accounts payable	($211,000)	($42,000)			($253,000)
Long-term liabilities	($748,000)	($260,000)			($1,008,000)
Common stock - $1 par value	($130,000)				($130,000)
Common stock - $20 par value		($120,000)	$120,000
Additional paid-in capital	($526,500)				($526,500)
Retained earnings, 1/1/8	($675,400)	($419,300)	$419,300		($675,400)
Total	($2,290,900)	($841,300)	$612,000	$612,000	($2,592,900)

Notes:

Compute book value of assets acquired as follows
Particulars	Amount
Cash	$30,200
Receivable	$124,000
Inventory	$140,000
Land	$252,000
Buildings	$227,000
Equipment	$68,100
Accounts payable	($42,000)
Long-term liabilities	($260,000)
Total book value of assets acquired	$539,300

Compute gain on bargain purchase as follows
Particulars	Amount	Amount
Cash	$30,200
Receivable	$124,000
Inventory ($140,000 + $8,100)	$148,100
Land ($252,000 + $30,000)	$282,000
Buildings ($227,000 + $34,600)	$261,600
Equipment	$68,100
Accounts payable	($42,000)
Long-term liabilities	($260,000)
Total fair value net of assets acquired		$612,000
Deduct: Fair value of purchase consideration paid
Long-term liabilities	$260,000
Common stock (20,000 × $10)	$200,000
Total consideration paid		$460,000
Gain on bargain purchase		$152,000

Compute cash balance as follows:
Beginning balance	$87,900
Deduct: Acquisition costs	($28,500)
Deduct: Stock issuance costs	($13,500)
Ending balance	$45,900
Compute long-term liabilities as follows:
Beginning balance	$488,000
Issued during acquisition	$260,000
Ending balance	$748,000
Compute common stock as follows:
Beginning balance	$110,000
New stock issued (20,000 × $1)	$20,000
Ending balance	$130,000
Compute additional paid-in capital as follows:
Beginning balance	$360,000
Add: New stock issued (20,000 × $9)	$180,000
Deduct: Stock issuance costs	($13,500)
Ending balance	$526,500
Compute retained earnings balance as follows:
Beginning balance	$551,900
Add: Gain on purchase bargain	$152,000
Deduct: Acquisition costs	($28,500)
Ending balance	$675,400