Question

On January 1, 20X2, Plend Corporation acquired all of Stork Corporation's assets and liabilities by issuing shares of its common stock. Partial balance sheet data for the companies prior to the business combination and immediately following the combination are as follows:

	Plend Corp.						Stork Corp.
	Book Value						Book Value				Combined Entity
Assets
Cash		$	40,000				$	10,000				$	50,000
Accounts Receivable			60,000					30,000					88,000
Inventory			50,000					35,000					96,000
Buildings & Equipment (net)			300,000					110,000					430,000
Goodwill													?
Total Assets		$	450,000				$	185,000				$	?
Liabilities and Equities
Accounts Payable		$	32,000				$	14,000				$	46,000
Bonds Payable			150,000					70,000					220,000
Bond Premium			6,000										6,000
Common Stock, $5 par			100,000					40,000					126,000
Additional Paid-In Capital			65,000					28,000					247,000
Retained Earnings			97,000					33,000					?
Total Liabilities & Equities		$	450,000				$	185,000				$	?

Required:

e. What amount of goodwill, if any, will be reported by the combined entity immediately following the combination?

f. What balance in retained earnings will the combined entity report immediately following the combination?


g. If the depreciable assets held by Stork had an average remaining life of 10 years at the date of acquisition, what amount of depreciation expense will be reported on those assets in 20X2?

Answer 1

fcSolution 1
Net assets attributed to Stork Corp.
Assets	Plend Corp.	Combined entity	The value attributed to Stork Corp
Cash	$                  40,000	$                        50,000	$                  10,000
Account receivable	$                  60,000	$                        88,000	$                  28,000
Inventory	$                  50,000	$                        96,000	$                  46,000
Buidling	$                300,000	$                     430,000	$                130,000
Accounts payable	$                 (32,000)	$                      (46,000)	$                 (14,000)
Bonds payable	$               (150,000)	$                    (220,000)	$                 (70,000)
Bond Premium	$                   (6,000)	$                        (6,000)	$                           -
Net asset value	$                262,000	$                     392,000	$                130,000
Amount paid to Stork Corp.
Common Stock	$                100,000	$                     126,000	$                  26,000
Additional paid in capital	$                  65,000	$                     247,000	$                182,000
Amount paid to Stork Corp.	$                165,000	$                     373,000	$                208,000
Since amount paid to Stork Corp is higher than Stork Corp's NAV, hence the difference will be
attributed to goodwill.
Amount paid	$                208,000
Less NAV	$               (130,000)
Goodwill	$                  78,000
Solution 2
Since transaction resulted in goodwill, retained earnings will remain the same as before consolidation.
Assets	Plend Corp.	Combined entity
Cash	$                  40,000	$                        50,000
Account receivable	$                  60,000	$                        88,000
Inventory	$                  50,000	$                        96,000
Buidling	$                300,000	$                     430,000
Goodwill		$                        78,000
Total asset	$                450,000	$                     742,000
Liabilities
Accounts payable	$                  32,000	$                        46,000
Bonds payable	$                150,000	$                     220,000
Bond Premium	$                     6,000	$                          6,000
Common Stock	$                100,000	$                     126,000
Additional paid in capital	$                  65,000	$                     247,000
Retained earnings	$                  97,000	$                       97,000	Retained earnings reported
Total liabilities and equities	$                450,000	$                     742,000
Solution 3
The value attributed to the depreciable assets of Stork Corp.	$                130,000
Useful life in years	10
Annual depreciation	$                  13,000