Question

On December 31, Pacifica, Inc., acquired 100 percent of the voting stock of Seguros Company. Pacifica will maintain Seguros as a wholly owned subsidiary with its own legal and accounting identity. The consideration transferred to the owner of Seguros included 56,500 newly issued Pacifica common shares ($20 market value, $5 par value) and an agreement to pay an additional $130,000 cash if Seguros meets certain project completion goals by December 31 of the following year. Pacifica estimates a 50 percent probability that Seguros will be successful in meeting these goals and uses a 4 percent discount rate to represent the time value of money.

Immediately prior to the acquisition, the following data for both firms were available:

	Pacifica				Seguros Book Values				Seguros Fair Values
Revenues	$	(2,110,000	)
Expenses		1,477,000
Net income	$	(633,000	)
Retained earnings, 1/1	$	(1,026,000	)
Net income		(633,000	)
Dividends declared		171,000
Retained earnings, 12/31	$	(1,488,000	)
Cash	$	162,000			$	154,000			$	154,000
Receivables and inventory		254,000				93,000				73,500
Property, plant, and equipment		2,190,000				487,000				662,500
Trademarks		353,000				248,000				293,000
Total assets	$	2,959,000			$	982,000
Liabilities	$	(596,000	)		$	(258,000	)		$	(258,000	)
Common stock		(400,000	)			(200,000	)
Additional paid-in capital		(475,000	)			(70,000	)
Retained earnings		(1,488,000	)			(454,000	)
Total liabilities and equities	$	(2,959,000	)		$	(982,000	)

In addition, Pacifica assessed a research and development project under way at Seguros to have a fair value of $157,000. Although not yet recorded on its books, Pacifica paid legal fees of $24,600 in connection with the acquisition and $11,700 in stock issue costs.

a. Prepare Pacifica’s entries to account for the consideration transferred to the former owners of Seguros, the direct combination costs, and the stock issue and registration costs.

b.&c. Present a worksheet showing the postacquisition column of accounts for Pacifica and the consolidated balance sheet as of the acquisition date.

Answer 1

a	Journal entries
	To account for the consideration transferred to the former owners of Seguros
	Investment in Seguros	$1,192,500
	Common Stock		$282,500
	APIC		$847,500
	Contingent performance obligation		$62,500
	Contingent performance obligation = $130000 x 50% x 0.96154 = $62500
	Present value of $1 @ 4% for a period of year 1 = 0.96154
	To record direct combination cost
	Combination Cost	$24,600
	Cash		$24,600
	To record stock issue and registration cost
	APIC	$11,700
	Cash		$11,700
b	Postacquisition column of accounts for Pacifica
		Opening Balance	Acquired	Adjustments	Post acquisition Balance
	Cash	$162,000	$154,000	-$36,300	$279,700
	Receivable and inventory	$254,000	$73,500		$327,500
	Investment in Seguros			$1,192,500	$1,192,500
	Property, plant and equipment	$2,190,000	$662,500		$2,852,500
	Trademarks	$353,000	$293,000		$646,000
	Liabilities	-$596,000	-$258,000	-$62,500	-$916,500
	Common Stock	-$400,000		-$282,500	-$682,500
	APIC	-$475,000		-$835,800	-$1,310,800
	Retained earnings	-$1,488,000			-$1,488,000
	Combination cost			$24,600	$24,600
	Research and development project			$157,000	$157,000
c	Consolidated Balance sheet as of acquisition date
		Pacifica	Seguros	Elimination/ adjustments	Consolidated Total
	Cash	$125,700	$154,000		$279,700
	Receivables and Inventory	$254,000	$93,000	-$19,500	$327,500
	Investment in Seguros	$1,192,500		-$1,192,500	$0
	Research and development project			$157,000	$157,000
	Property, Plant and equipment	$2,190,000	$487,000	$175,500	$2,852,500
	Trademarks	$353,000	$248,000	$45,000	$646,000
	Goodwill			$110,500	$110,500
	Total Assets	$4,115,200	$982,000		$4,373,200
	Liabilities	-$658,500	-$258,000		-$916,500
	Common Stock	-$682,500	-$200,000	$200,000	-$682,500
	APIC	-$1,310,800	-$70,000	$70,000	-$1,310,800
	Retained Earnings	-$1,463,400	-$454,000	$454,000	-$1,463,400
	Total Liabilities and equities	-$4,115,200	-$982,000	$0	-$4,373,200