Question

The July 31, Year 3, balance sheets of two companies that are parties to a business combination are as follows:

	Red Corp.				Sax Inc.
	Carrying Amount				Carrying Amount				Fair Value
Current assets	$	1,740,000			$	434,000		$	482,000
Property, plant, and equipment (net)		1,248,000				854,000			986,000
Patents		-				-			86,000
	$	2,988,000			$	1,288,000
Current liabilities	$	1,500,000			$	266,000			266,000
Long-term debt		494,000				374,000			398,000
Common shares		860,000				182,000
Retained earnings		134,000				466,000
	$	2,988,000			$	1,288,000

In addition to the property, plant, and equipment identified above, Red Corp. attributed a value of $114,000 to Sax’s assembled workforce. They have the knowledge and skill to operate Sax’s manufacturing facility and are essential to the success of the operation. Although the eight manufacturing employees are not under any employment contracts, management of Red was willing to pay $114,000 as part of the purchase price on the belief that most or all of these employees would continue to work for the company.

Effective on August 1, Year 3, the shareholders of Sax accepted an offer from Red Corporation to purchase all of their common shares. Red’s costs for investigating and drawing up the share purchase agreement amounted to $16,000.

Required:

(a) Assume that Red made a $960,000 cash payment to the shareholders of Sax for 100% of their shares.

(i) Prepare the journal entry in the records of Red to record the share acquisition. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Transaction 1: Record the acquisition of shares from Sax for $960,000 and payment of professional fees of $16,000.

(ii) Prepare the consolidated balance sheet of Red Corp. as at August 1, Year 3.

	Red Corp. Consolidated Balance Sheet August 1, Year 3 Assets $0 Liabilities and Equity $0

(b) Assume that Red issued 120,000 common shares, with market value of $8 per share to the shareholders of Sax for 100% of their shares. Legal fees associated with issuing these shares amounted to $4,000 and were paid in cash. Red is identified as the acquirer.

(i) Prepare the journal entries in the records of Red to record the share acquisition and related fees. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

(Part B, Soultion not required, only use question to solve for Part C)

(c) Assume the same facts as part (b) except that Red is a private company, uses ASPE, and chooses to use the cost method to account for its investment in Sax.

(i) Prepare the journal entries in the records of Red to record the share acquisition and related fees. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

transscation 1: Record the acquisition of shares from Sax for $960,000.

Transcation 2: Record the $16,000 cash paid for professional fees expense and $4000 paid for legal fees for issue of shares.

(ii) Prepare the balance sheet of Red as at August 1, Year 3.

	Red Corp. Balance Sheet August 1, Year 3 Assets 0 Liabilities and Equity $0

Answer 1

REQUIRED   A :
1)
GENERAL JOURNAL	DEBIT	CREDIT
Investment in sax	$ 960,000
Professional fees expense	$ 16,000
Cash		$ 976,000
( to record red to record the share acquisition )

2)
RED CORP.
Consolidated Balance sheet
August 1 year 3
ASSETS :
Current assets (1,740,000+ 482,000 -976,000)	$ 1,246,000
Plant and equipment( 1,248,000+986,000)	$ 2,234,000
Patents	$ 86,000
Goodwill( balance in fig )	$ 70,000
	$ 3,636,000
LIABILITIES AND EQUITY :
Current liabilities (1,500,000+ 266,000)	$ 1,766,000
Long term debt (494,000 + 398,000)	$ 892,000
Common shares	$ 860,000
Retained earnings (134,000 - 16,000)	$ 118,000
	$ 3,636,000

REQUIRED   C :
1)
GENERAL JOURNAL	DEBIT	CREDIT
Investment in sax	$ 960,000
Common shares		$ 960,000
( to record acquisition of shares from sax )
2)
GENERAL JOURNAL	DEBIT	CREDIT
Investment in sax	$ 16,000
Common shares	$ 4,000
Cash		$ 20,000
( to record cash paid for professional expenses and legal expenses )

C (2) BALANCE SHEET OF RED AS AT AUGUST 1 ,YEAR 3 :
ASSETS :
Current assets (1,740,000 -20,000)	$ 1,720,000
Plant and equipment( NET )	$ 1,248,000
Investment in sax ( 960,000 + 16,000)	$ 976,000
	$ 3,944,000
LIABILITIES AND EQUITY :
Current liabilities	$ 1,500,000
Long term debt	$ 494,000
Common shares ( 860,000+ 960,000 - 4,000)	$ 1,816,000
Retained earnings	$ 134,000
	$ 3,944,000