Question

On December 31, Pacifica, Inc., acquired 100 percent of the voting stock of Seguros Company. Pacifica will maintain Seguros as a wholly owned subsidiary with its own legal and accounting identity. The consideration transferred to the owner of Seguros included 55,370 newly issued Pacifica common shares ($20 market value, $5 par value) and an agreement to pay an additional $130,000 cash if Seguros meets certain project completion goals by December 31 of the following year. Pacifica estimates a 50 percent probability that Seguros will be successful in meeting these goals and uses a 4 percent discount rate to represent the time value of money.

Immediately prior to the acquisition, the following data for both firms were available:

	Pacifica				Seguros Book Values				Seguros Fair Values
Revenues	$	(1,320,000	)
Expenses		924,000
Net income	$	(396,000	)
Retained earnings, 1/1	$	(1,035,000	)
Net income		(396,000	)
Dividends declared		174,000
Retained earnings, 12/31	$	(1,257,000	)
Cash	$	120,000			$	90,000			$	90,000
Receivables and inventory		726,000				321,000				303,100
Property, plant, and equipment		1,540,000				465,000				625,000
Trademarks		340,000				182,000				224,800
Total assets	$	2,726,000			$	1,058,000
Liabilities	$	(594,000	)		$	(276,000	)		$	(276,000	)
Common stock		(400,000	)			(200,000	)
Additional paid-in capital		(475,000	)			(70,000	)
Retained earnings		(1,257,000	)			(512,000	)
Total liabilities and equities	$	(2,726,000	)		$	(1,058,000	)

In addition, Pacifica assessed a research and development project under way at Seguros to have a fair value of $112,000. Although not yet recorded on its books, Pacifica paid legal fees of $22,500 in connection with the acquisition and $10,400 in stock issue costs.

a. Prepare Pacifica’s entries to account for the consideration transferred to the former owners of Seguros, the direct combination costs, and the stock issue and registration costs.

b.&c. Present a worksheet showing the postacquisition column of accounts for Pacifica and the consolidated balance sheet as of the acquisition date.

Answer 1

Part A

Account titles and explanation	debit	credit
Investment in Seguros	1169900
Common Stock (55370*5)		276850
Additional Paid-In Capital (55370*15)		830550
Contingent performance obligation (130000*50%*0.961538)		62500
(to record the acquisition on Pacifica’s records)
Professional Services Expense	22500
Cash		22500
Additional Paid-In Capital	10400
Cash		10400

Part B & C

	Pacifica	Seguros	Consolidation Entries		Consolidated Balance Sheet
Revenues	(1320000)				(1320000)
Expenses	924000				924000
Net income	(396000)				(396000)
Retained earnings, 1/1	(1035000)				(1035000)
Net income	(396000)				(396000)
Dividends declared	174000				174000
Retained earnings, 12/31	(1257000)				(1257000)
Cash	120000	90000			210000
Receivables and inventory	726000	321000		17900	1029100
Property, plant and equipment	1540000	465000	160000		2165000
Investment in Seguros	1169900			1169900	0
Research and development asset			112000		112000
Goodwill			91000		91000
Trademarks	340000	182000	42800		564800
Total assets	2726000	1058000			4171900
Liabilities	(594000)	(276000)			(870000)
Contingent performance obligation	(62500)				(62500)
Common stock	(676850)	(200000)	200000		(676850)
Additional paid-in capital	(1305550)	(70000)	70000		(1305550)
Retained earnings	(1257000)	(512000)	512000		(1257000)
Total liabilities and equities	(2726000)	(1058000)	1187800	1187800	(4171900)

321000-303100 = 17900

625000-465000 = 160000

224800-182000 = 42800

400000+276850 = 676850

475000+830550 = 1305550