On January 1, 2018, Chester Inc. acquires 100% of Festus Corp.'s outstanding common stock by exchanging 37,500 shares of Chester's $2 par value common voting stock. On January 1, 2018, Chester's voting common stock had a fair value of $40 per share. Festus' voting common shares were selling for $6.50 per share. Festus' balances on the acquisition date, just prior to acquisition are listed below.
Book Value Fair Value
Cash |
$ 30,000 |
|
Accounts Receivable |
120,000 |
$ 120,000 |
Inventory |
200,000 |
230,000 |
Land |
230,000 |
290,000 |
Building (net) |
450,000 |
600,000 |
Equipment (net) |
175,000 |
160,000 |
Accounts Payable |
(80,000) |
(80,000) |
Common Stock $1 par |
(500,000) |
|
Paid-in Capital |
(350,000) |
|
Retained Earnings 1/1/18 |
(275,000) |
Q1 – What Kind of combination is the purchase of Festus by Chester?
Q2 – What is the amount of Consideration?
Q3 – What is the Fair Value of Festus Corp Assets?
Q4 – Does the combination or purchase of Festus created Goodwill or a Bargain Gain?
Q5 – Compute amount of Goodwill or bargain Gain.
1) The purchase of Festus by Chester is the amalgamation in the nature of purchase as all the assets are taken at fair value.
2) The amount of consideration is equal to fair value of Chester's voting common stock issued in exchange of 100% shares of Festus which is calculated as follows:-
Consideration = No. of shares*Fair value per share
= 37,500 shares*$40 per share = $1,500,000
3) The Fair value of Festus Crop Assets is calculated as follows:-
Assets | Amount in $ |
Cash | 30,000 |
Accounts Receivable | 120,000 |
Inventory | 230,000 |
Land | 290,000 |
Building (net) | 600,000 |
Equipment (net) | 160,000 |
Total Fair value of Assets | 1,430,000 |
Fair value of Accounts Payable = $80,000
Fair value of net assets = Assets-Liabilities = $1,430,000 - $80,000 = $1,350,000
4) As the amount of consideration of $1,500,000 is more than the fair value of net assets purchased of $1,350,000, the combination of Festus created Goodwill.
5) The amount of goodwill = Purchase consideration - Fair value of net assets
= $1,500,000 - $1,350,000 = $150,000
On January 1, 2018, Chester Inc. acquires 100% of Festus Corp.'s outstanding common stock by exchanging...
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