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Assignment 2

busi 453 assignment 2

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72 views

Assignment 2

busi 453 assignment 2

Uploaded by

zhoudong910105
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ASSIGNMENT 2

Question 1 (15 marks)

The trial balances of Walla Corporation and AU Inc. at December 31, Year 4, just before the transaction
described below, were as follows:
Walla Au Inc.
Current assets $ 280,000 $ 190,000
Land 600,000 450,000
Other tangible assets 500,000 270,000
Liabilities 400,000 310,000
Common shares 200,000 50,000
Retained earnings, Jan 1, Year 4 600,000 240,000
Revenues 800,000 640,000
Expenses 620,000 330,000

On December 31, Year 4, Walla purchased all of the outstanding shares of Au Inc. by issuing 20,000
common shares with a market value of $38 per share. The carrying amounts of Au Inc.’s assets and
liabilities were equal to fair value except for the following:
Fair Value
Land $530,000
Liabilities 340,000

Required:
What are the balances for the land, goodwill, investment in common shares of Au Inc., liabilities,
common shares, and revenues after the transaction noted above on
a) Walla’s separate entity financial statements?
b) Au Inc.’s separate entity financial statements?
c) Walla’s consolidated financial statements?

*****
Question 2 (24 marks)
The July 31, Year 3, balance sheets of two companies that are parties to a business combination are as
follows:
Red Corp. Sax Inc.
Carrying Carrying Fair
Amount Amount Value

Current assets $ 1,600,000 $ 420,000 $ 468,000


Property, plant and equipment (net) 1080000 840000 972,000
Patents 0 0 72,000
$ 2,680,000 $ 1,260,000

Current liabilities $ 1,360,000 $ 252,000 252,000


Long-term debt 480,000 360,000 384,000
Common shares 720,000 168,000
Retained earnings 120,000 480,000
$ 2,680,000 $ 1,260,000

In addition to the property, plant, and equipment identified above, Red Corp. attributed a value of
$100,000 to Sax’s assembled workforce. They have the knowledge and skill to operate Sax’s
manufacturing facility and are critical to the success of the operation. Although the eight manufacturing
employees are not under any employment contracts, management of Red was willing to pay $100,000
as part of the purchase price on the belief that most or all of these employees would continue to work
for the company.
Effective on August 1, Year 3, the shareholders of Sax accepted an offer from Red Corporation to
purchase all of their common shares. Red’s costs for investigating and drawing up the share purchase
agreement amounted to $23,000.
Required:
a) Assume that Red made a $1,040,000 cash payment to the shareholders of Sax for 100% of their
shares.
I) Prepare the journal entry in the records of Red to record the share acquisition.
II) Prepare the consolidated balance sheet of Red Corp. as at August 1, Year 3. Explain the
rationale for the accounting for the $100,000 value attributed to Sax’s assembled workforce.
b) Assume that Red issued 130,000 common shares, with a market value of $8 per share to the
shareholders of Sax for 100% of their shares. Legal fees associated with issuing these shares
amounted to $11000 and were paid in cash. Red is identified as the acquirer.
i) Prepare the journal entry in the records of Red to record the share acquisition and related
fees.
ii) Prepare the consolidated balance sheet of Red as at August 1, Year 3.
c) Assume the same facts as b) except that Red is a private company, uses ASPE, and chooses to use
the cost method to account for its investment in Sax.
i) Prepare the journal entry in the records of Red to record the share acquisition and related
fees.
ii) Prepare the balance sheet of Red as at August 1, Year 3.

*****
Question 3 (11 marks)

G Company is considering the takeover of K Company whereby it will issue 7,500 common shares for
all of the outstanding shares of K Company. K Company will become a wholly owned subsidiary of G
Company. Prior to the acquisition, G Company had 13,000 shares outstanding, which were trading
at $8.00 per share. The following information has been assembled:

G Company K Company
Carrying Amount Fair Value Carrying Amount Fair Value
Current assets $ 47,000 $ 54,500 $ 24,000 $ 16,200
Plant assets (net) 74,000 84,000 34,000 39,000
$ 121,000 $ 58,000

Current liabilities $ 21,400 $ 21,400 $ 6,400 $ 6,400


Long-term debt 22,000 26,000 3,900 4,600
Common shares 44,000 24,000
Retained earnings 33,600 23,700
$ 121,000 $ 58,000

Required:

Prepare G Company’s consolidated balance sheet immediately after its acquisition of K Company.

END OF ASSIGNMENT

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