Question

Gigo Company acquires all of the voting stock of Hanna Corporation for 100,000,000 in cash on January 1, 2014, in a statutory merger. Hanna's balance sheet at the date of acquisition is as follows:

Current assets: 25,000,000
Plant and equipment: 400,000,000
Liabilities: (415,000,000)
Capital stock: (1,000,000)
Retained earnings: (9,000,000)

Hanna's plant and equipment is overvalued by 8,000,000 and it has unreported intangibles with a fair value of 25,000,000. Gigo's entry to record its acquisition of Hanna Corporation will include a:
1) Debit to Plant and Equipment for 400,000,000
2) Credit to Cash for 100,000,000
3) Credit to Capital Stock for 1,000,000
4) Debit to Retained Earnings for 9,000,000

Answer 1

Gigo Company's journal entry for the acquisition of Hanna Corporation would include adjustments to reflect the fair values of assets and the consideration transferred, not the book values of Hanna's equity accounts, which are eliminated in consolidation.

Step-by-step explanation:

The question concerns the acquisition journal entry that Gigo Company would make upon acquiring Hanna Corporation. When Gigo Company acquires Hanna in a statutory merger, certain adjustments are made to Hanna's book values to reflect fair values on the acquisition date. Given Hanna's overvaluation of plant and equipment by $8,000,000 and unreported intangibles with a fair value of $25,000,000, Gigo's entry would not include a debit to plant and equipment for $400,000,000. Instead, it would be debited for $392,000,000, which is the $400,000,000 book value minus the $8,000,000 overvaluation. Moreover, Gigo would recognize the unreported intangibles by debiting an Intangible Assets account for the fair value of $25,000,000. The credit to cash for $100,000,000 reflects the payment made to acquire Hanna. Nevertheless, there is no credit to Capital Stock for $1,000,000 nor a debit to Retained Earnings for $9,000,000 because these are internal book values of Hanna and are eliminated upon consolidation.