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P02-24 (Template in Excel spreadsheet) Pratt Company acquired all of Spider, Inc’s outstanding shares on December 31, 2009, for $495,000 cash. Although many of Spider’s book values approximate fair values, several of its accounts have fair values that differ from book values. In addition, Spider has internally developed assets that remain unrecorded on its books. In deriving the acquisition price, Pratt assessed Spider’s fair and book value differences as follows:
Book Values Fair Values
Computer Software………………………………….. 20,000 70,000
Equipment………………………………………………… 40,000 30,000
Client Contracts……………………………………….. -0- 100,000
In-process research & Development……… -0- 40,000
Notes payable………………………………………… (60,000) (65,000)
At December 31, 2009 the following financial information is available for consolidation:
Pratt Spider
Cash ………………………………………………………… 36,000 18,000
Receivables……………………………………………. 116,000 52,000
Inventory………………………………………………. 140,000 90,000
Investment in Spider…………………………….. 495,000 -0-
Computer Software……………………………….. 210,000 20,000
Buildings (Net)………………………………………. 595,000 130,000
Equipment (Net)………………………………….. 308,000 40,000
Client contracts…………………………………….. -0- -0-
Goodwill ………………………………………………. -0- -0-
Total Assets…………………………….. 1,900,000 350,000
Accounts payable………………………………… (88,000) (25,000)
Notes payable……………………………………… (510,000) (60,000)
Common Stock……………………………………… (380,000) (100,000)
Additional paid-in capital………………………. (170,000) (25,000)
Retained Earnings…………………………………… (752,000) (140,000)
Total liabilities and equities…………. (1,900,000 (350,000)
Prepare a consolidated balance sheet for Pratt and Spider as of December 31, 2009.
2. On January 1, 2011, NewTune Company exchanges 15,000 shares of its common stock for all of the outstanding shares of On-the-Go, Inc. Each of NewTune’s shares has a $4 par value and a $50 fair value. The fair value of the stock exchanged in the acquisition was considered equal to On-the-Go’s fair value. NewTune also paid $25,000 in stock registration and issuance costs in connection with the merger. Several of On-the-Go’s accounts have fair values that differ from their book values on this date:
| Book Values | Fair Values | |
| Receivables | $65,000 | $63,000 |
| Trademarks | 95,000 | 225,000 |
| Record music catalog | 60,000 | 180,000 |
| In-process research and development | –0– | 200,000 |
| Notes payable | (50,000) | (45,000) |
Precombination January 1, 2011, book values for the two companies are as follows:
| NewTune | On-the-Go | |
| Cash | $60,000 | $29,000 |
| Receivables | 150,000 | 65,000 |
| Trademarks | 400,000 | 95,000 |
| Record music catalog | 840,000 | 60,000 |
| Equipment (net) | 320,000 | 105,000 |
| Totals | $1,770,000 | $354,000 |
| Accounts payable | ($110,000) | ($34,000) |
| Notes payable | (370,000) | (50,000) |
| Common stock | (400,000) | (50,000) |
| Additional paid-in capital | (30,000) | (30,000) |
| Retained earnings | (860,000) | (190,000) |
| Totals | ($1,770,000) | ($354,000) |
Required:
a. Assume that this combination is a statutory merger so that On-the-Go’s accounts will be transferred to the records of NewTune. On-the-Go will be dissolved and will no longer exist as a legal entity. Using the acquisition method, prepare a postcombination balance sheet for NewTune as of the acquisition date.
b. Assume that no dissolution takes place in connection with this combination. Rather, both companies retain their separate legal identities. Using the acquisition method, prepare a worksheet to consolidate the two companies as of the combination date.
c. How do the balance sheet accounts compare across parts (a) and (b)?
Problem 28 (continued):
Post-Combination Balance Sheet:
b.
28. (continued) NEWTUNE, INC., AND ON-THE-GO CO.
b. Consolidation Worksheet
January 1, 2013
Consolidation Entries Consolidated Accounts NewTune, Inc. On-the-Go Co. Debit Credit Totals
Cash
Receivables
Investment in On-the-Go
Trademarks
Record music catalog
Research and development asset
Equipment
Goodwill
Totals
Accounts payable
Notes payable
Common stock
Additional paid-in capital
Retained earnings
Totals
c.
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