Question

Prince Corporation acquires Squire Service Corporation for 1 million shares of Prince stock, valued at $30 per share. Squire is merged into Prince, although it continues to do business under the Squire Service name. Professional fees connected with the acquisition are $900,000 and costs of registering and issuing the new shares are $400,000, both paid in cash. Squire performs vehicle maintenance services for owners of auto, truck and bus fleets. Squire's balance sheet at acquisition is as follows:

Cash	$200,000	Current liabilities	$2,900,000
Accounts receivable	2,500,000	Long-term liabilities	8,600,000
Parts inventory	5,200,000	Stockholders' equity	13,200,000
Equipment	16,800,000
Total assets	$24,700,000	Total liabilities and equity	$24,700,000

In reviewing Squire's assets and liabilities, you determine the following:

On a discounted present value basis, the accounts receivable have a fair value of $2,300,000, and the long-term liabilities have a fair value of $8,000,000.

The current replacement cost of the parts inventory is $6,000,000.

The current replacement cost of the equipment is $18,500,000.

Squire occupies its service facilities under an operating lease with ten years remaining. The rent is below current market levels, giving the lease an estimated fair value of $1,250,000.

Squire has long-term service contracts with several large fleet owners. These contracts have been profitable; the present value of expected profits over the remaining term of the contracts is estimated at $1,000,000.

Squire has a skilled and experienced work force. You estimate that the cost to hire and train replacements would be $750,000.

Squire's trade name is well-known among fleet owners and is estimated to have a fair value of $200,000.

(a) Calculate the amount of goodwill that Prince records for the acquisition.
$Answer

(b) Prepare Prince's journal entry or entries to record the merger with Squire.

General Journal
Description	Debit	Credit
Cash	Answer	Answer
Accounts receivable	Answer	Answer
Parts inventory	Answer	Answer
Equipment	Answer	Answer
Intangible: Lease	Answer	Answer
Intangible: Service contracts	Answer	Answer
Intangible: Trade name	Answer	Answer
Goodwill	Answer	Answer
AnswerMerger expensesCashContingent consideration liabilityGain on purchase	Answer	Answer
AnswerMerger expensesCashContingent consideration liabilityGain on purchase	Answer	Answer
Current liabilities	Answer	Answer
Long-term liabilities	Answer	Answer
Capital stock	Answer	Answer

Answer 1