Answer:
This scenario describes a business combination in which Alfonso Inc. acquired 100% ownership of BelAire Company on January 1, 2020, using both cash and common stock as consideration. The combination is a statutory merger, meaning that BelAire is dissolved as a legal corporation and its assets and liabilities are assigned to a new reporting unit.
To record this business combination, Alfonso would need to perform a detailed analysis of the fair values of the assets and liabilities of BelAire as of the acquisition date, and allocate the total consideration paid (i.e., $387,500 in cash plus the fair value of 100,000 shares of Alfonso's common stock) to those assets and liabilities based on their fair values.
Assuming that the fair values of the assets and liabilities of BelAire on the acquisition date were as follows:
Assets:
Cash: $50,000
Accounts receivable: $100,000
Inventory: $150,000
Property, plant, and equipment: $400,000
Goodwill: $200,000
Liabilities:
Accounts payable: $75,000
Long-term debt: $250,000
The total fair value of BelAire's net assets is ($50,000 + $100,000 + $150,000 + $400,000 + $200,000) - ($75,000 + $250,000) = $575,000.
The allocation of the consideration paid would be as follows:
Cash paid: $387,500
Fair value of 100,000 shares of Alfonso's common stock: 100,000 shares x $15 per share = $1,500,000
Total consideration paid: $1,887,500
Allocation of consideration:
Cash: $50,000 / $575,000 x $1,887,500 = $164,348
Accounts receivable: $100,000 / $575,000 x $1,887,500 = $328,261
Inventory: $150,000 / $575,000 x $1,887,500 = $492,174
Property, plant, and equipment: $400,000 / $575,000 x $1,887,500 = $1,310,870
Goodwill: $200,000 / $575,000 x $1,887,500 = $657,391
Accounts payable: $75,000 / $575,000 x $1,887,500 = $246,739
Long-term debt: $250,000 / $575,000 x $1,887,500 = $818,478
The entry to record the acquisition would be:
Debit Property, plant, and equipment: $1,310,870
Debit Goodwill: $657,391
Debit Cash: $164,348
Debit Accounts receivable: $328,261
Debit Inventory: $492,174
Credit Accounts payable: $246,739
Credit Long-term debt: $818,478
Credit Cash: $387,500
Credit Common stock: $1,500,000
This entry records the allocation of the total consideration paid to the assets and liabilities acquired, as well as the issuance of Alfonso's common stock to BelAire's shareholders.