Question

On January 1, 2018, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:

	Moody				Osorio
Cash	$	180			$	40
Receivables		810				180
Inventories		1,080				280
Land		600				360
Buildings (net)		1,260				440
Equipment (net)		480				100
Accounts payable		(450	)			(80	)
Long-term liabilities		(1,290	)			(400	)
Common stock ($1 par)		(330	)
Common stock ($20 par)						(240	)
Additional paid-in capital		(1,080	)			(340	)
Retained earnings		(1,260	)			(340	)

Note: Parentheses indicate a credit balance.

In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60.

If Osorio retains a separate corporate existence, what amount was recorded as the investment in Osorio?

Answer 1

Answer:

Given:

To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share.

Investment in Osorio:

Issue of Long-term liabilities = $400

Issue of shares:

Common Stock  = 40 * $1 = $40

Additional paid in capital 40 * ($10 - $1) = $360

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Investment in Osorio = $800

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Hence:

If Osorio retains a separate corporate existence, amount recorded as the investment in Osorio = $800