Question

1. The following book and fair values were available for Bedele Share Company as of March 1. Book Value $ 630,000 750,000 1,700,000 Inventory Land Buildings Customer relationships Accounts payable Common stock Additional paid-in capital Retained earnings 1/1 Revenues Expenses -0- (80,000) (2,000,000) (500,000) (360,000) (420,000) 280,000 Fair Value $ 600,000 990,000 2,000,000 800,000 (80,000) Walya Share Company pays $4,000,000 cash and issues 20,000 shares of its $2 par value common stock (fair value of $50 per share) for all of Bedele common stock in a merger, after which Bedele will cease to exist as a separate entity. Stock issue costs amount to $25,000 and Walya pays $42,000 for legal fees to complete the transaction. Required: Prepare Walya's journal entry to record its acquisition of Bedele. ​

Answer 1

Walya Share Company's journal entry to record its acquisition of Bedele is as follows:

Dr. Inventory $600,000

Dr. Land $990,000

Dr. Buildings $2,000,000

Dr. Customer relationships $800,000

Cr. Cash $4,000,000

Cr. Common stock $40,000

Cr. Additional paid-in capital $3,960,000

Cr. Legal fees $42,000

Cr. Stock issue costs $25,000

Explanation:

Walya Share Company paid $4,000,000 in cash and issued 20,000 shares of its $2 par value common stock (fair value of $50 per share) for all of Bedele's common stock in a merger. The total fair value of Bedele's assets acquired was $4,390,000 (i.e., $600,000 + $990,000 + $2,000,000 + $800,000). Walya Share Company will record the acquisition as follows:

1. The fair value of Bedele's identifiable assets acquired will be recognized as follows:

Dr. Inventory $600,000

Dr. Land $990,000

Dr. Buildings $2,000,000

Dr. Customer relationships $800,000

2. The total consideration paid by Walya Share Company to Bedele's shareholders will be recognized as follows:

Cr. Cash $4,000,000

Cr. Common stock $40,000 ($2 par value x 20,000 shares)

Cr. Additional paid-in capital $3,960,000 (i.e., [$50 fair value - $2 par value] x 20,000 shares)

3. The costs incurred by Walya Share Company to complete the transaction will be recognized as follows:

Cr. Legal fees $42,000

Cr. Stock issue costs $25,000

Therefore, the total amount of the journal entry should be $4,390,000, which is the total fair value of Bedele's assets acquired.

Answer 2

The total fair value of Bedele Share Company's assets and liabilities is as follows:

Total fair value of assets = ($600,000 + $990,000 + $2,000,000 + $800,000) = $4,390,000

Total fair value of liabilities = ($80,000) = $80,000

Therefore, the fair value of the net assets acquired by Walya Share Company is:

$4,390,000 - $80,000 = $4,310,000

The amount paid by Walya Share Company is $4,000,000 cash and 20,000 shares of common stock (fair value of $50 per share), which is:

$4,000,000 + (20,000 x $50) = $5,000,000

The excess of the amount paid over the fair value of the net assets acquired is:

$5,000,000 - $4,310,000 = $690,000

To record the acquisition of Bedele Share Company by Walya Share Company, the journal entry is:

Debit Land $360,000

Debit Buildings $1,300,000

Debit Customer relationships $500,000

Debit Additional paid-in capital $690,000

Credit Common stock $40,000

Credit Additional paid-in capital $1,960,000

Credit Cash $4,000,000

Credit Stock issue costs $25,000

Credit Legal fees $42,000

(Note: Retained earnings and accounts payable are not included in the journal entry because they are eliminated in the consolidation process.)