Question

Retail Records Inc. acquired all of Decibel Studios' voting shares on January 1, 20X2, for $280,000. Retail's balance sheet immediately after the combination contained the following balances:

RETAIL RECORDS INC. Balance Sheet January 1, 20X2

Cash and Receivables $120,000 Accounts Payable $75,000
Inventory 110,000 Taxes Payable 50,000
Land 70,000 Notes Payable 300,000
Buildings and Equipment (net) 350,000 Common Stock 400,000
Investment in Decibel Stock 280,000 Retained Earnings 105,000
Total Assets $930,000 Total Liabilities and Stockholders' Equity $930,000

Decibel’s balance sheet at acquisition contained the following balances: DECIBEL STUDIOS Balance Sheet January 1, 20X2

Cash and Receivables $40,000 Accounts Payable $90,000
Inventory 180,000 Notes Payable 250,000
Buildings and Equipment (net) 350,000 Common Stock 100,000
Goodwill 30,000 Additional Paid-In Capital 200,000
Retained Earnings (40,000 )
Total Assets $600,000 Total Liabilities and Stockholders' Equity $600,000

On the date of combination, the inventory held by Decibel had a fair value of $170,000, and its buildings and recording equipment had a fair value of $375,000. Goodwill reported by Decibel resulted from a purchase of Sound Stage Enterprises in 20X1. Sound Stage was liquidated and its assets and liabilities were brought onto Decibel's books.

Required:
Compute the balances to be reported in the consolidated balance sheet immediately after the acquisition for:

a. Inventory.
b. Buildings and Equipment (net).
c. lnvestment in Decibel Stock.
d. Goodwill.
e. Common Stock.
f. Retained Earnings.

Answer 1

a. Inventory = $280,000

b. Buildings and Equipment (net) $725,000

c. lnvestment in Decibel Stock = 0

d. Goodwill = $35,000

e. Common Stock = $400,000

f. Retained Earnings = $105,000

Step-by-step explanation:

A balance sheet is a snapshot of the assets, liabilities, and equity of a business at any point in time.

From the information given we will calculate the following:

a. Inventory = Initial Inventory + Present inventory = 110,000 + 170,000 = $280,000

b. Buildings and Equipment (net) = initial building value + present building value = 350,000 + 375,000 = $725,000

c. lnvestment in Decibel Stock will not appear in the consolidated balance sheet as it is cancelled out by liquidation

d. Goodwill = Fair value of consideration + Fair value of Decibel's assets

Fair value of Decibel assets will be assets less liabilities

Goodwill = 280,000 + (40,000 + 170,000 + 375,000 - 90,000 - 250,000 - 245,000)

Goodwill = $35,000

e. Common Stock = $400,000

f. Retained Earnings = $105,000