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 56,570 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	$	(1,270,000	)
Expenses		889,000
Net income	$	(381,000	)
Retained earnings, 1/1	$	(1,048,000	)
Net income		(381,000	)
Dividends declared		139,000
Retained earnings, 12/31	$	(1,290,000	)
Cash	$	125,000			$	121,000			$	121,000
Receivables and inventory		647,000				146,000				135,200
Property, plant, and equipment		1,590,000				457,000				623,500
Trademarks		378,000				227,000				284,200
Total assets	$	2,740,000			$	951,000
Liabilities	$	(575,000	)		$	(237,000	)		$	(237,000	)
Common stock		(400,000	)			(200,000	)
Additional paid-in capital		(475,000	)			(70,000	)
Retained earnings		(1,290,000	)			(444,000	)
Total liabilities and equities	$	(2,740,000	)		$	(951,000	)

In addition, Pacifica assessed a research and development project under way at Seguros to have a fair value of $160,000. Although not yet recorded on its books, Pacifica paid legal fees of $17,300 in connection with the acquisition and $8,000 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

A business combination is the union of the small business units into one. The new combined unit is known as business combination.This is done for various purposes. A business combinatio generally increases the efficiency and productivity while reducing the costs.

Asset is an entity that is owned by the company,which can be converted to cash by the company.For eg:Building,cash,equipment,Accounts receivables,shares,insurance policies etc.In any manufacturing business,these are the elements of the assets.

Stockholder equity is the equity owned by the individuals when they own the shares or stocks of the other company.

Goodwill is the kind of intangible asset.It arises when one company acquires another one for a premium means they pay extra than the market value of the company.

a)

Journal enteries will be as follows:-

Journal enteries to record the acquision on pacificas records.

Investment in seguros	$1,193,900
common stock (56,570 * $5)	$282,850
Additional paid in capital(56570 * $15)	$848,550
Contingent Performance Obligation $130000 * 50% * 0.961538 present value factor	$ 62,500

Professional services expenses	$17,300
cash		$17,300
Additional paid in capital	$8,000
cash		$8,000

b&c)

	Pacifica	sequros	Consolidation enteries		Consolidated balancesheet
Revenues	$ -1,270,000				$ -1,270,000
Expenses	$ 889,000				$ 889,000
Net income	$ -381,000				$ -381,000
Retained Earnings 1/1	$ -1,048,000				$ -1,048,000
Net income	$ -381,000				$ -381,000
Dividend declared	$ 139,000				$ 139,000
Retained earnings 12/31	$ -1,290,000				$ -1,290,000
Cash	$ 99,700 (125000-17300-8000)	$ 121,000			$ 220,700
Receivables and inventory	$ 647,000	$ 146,000		$ 10,800	$ 782,200
Property,Plant & equipment	$ 1,590,000	$ 457,000	$ 166,500		$2,213,500
Investment in sequros	$ 1,193,900			$ 714,000
				$ 469,100
Research & development asset			$ 160,000		$ 160,000
Goodwill			$ 96,200		$ 96,200
Trademarks	$ 378,000	$ 227,000	$ 57,200		$ 662,200
Total assets	$ 3,908,600	$951,000			$ 4,112,750
Liabilities	$ -575,000	$ -237,000			$ -812,000
Contingent Performance Obligation	$ 62,500				$ -62,500
common stock	$ -682,850	$ -200,000	$ 200,000		$ -650,000
Additional paid in capital	$ -1,315,550	$ -70,000	$ 70,000		$ -1,315,550

Retained earnings	$ -1,272,700	$ -444,000	$ 444,000		$ -1,272,700
Total liabilities & equities	$ -3,908,600	$ -951,000	$ 1,193,900	$ 1,193,900	$ -4,112,750