Question

Bagley Incorporated’s statement of financial position as at July 31, Year 4, is as follows:

BAGLEY INCORPORATED STATEMENT OF FINANCIAL POSITION At July 31, Year 4
	Carrying Amount			Fair Value
Plant and equipment (net)	$	919,000		$	1,062,000
Patents		-			87,000
Current assets		464,000			516,000
	$	1,383,000
Ordinary shares	$	192,000
Retained earnings		511,000
Long-term debt		399,000			425,000
Current liabilities		282,000			282,000
	$	1,383,000

On August 1, Year 4, the directors of Bagley considered a takeover offer from Davis Inc., whereby the corporation would sell all of its assets and liabilities. Davis’s costs of investigation and drawing up the merger agreement would amount to $24,000.

Required:

(a) Assume that Davis made a $1,223,200 cash payment to Bagley for its net assets. Prepare the journal entries in the accounting records of Davis to record the business combination. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Transcation 1: Record the acquisition of net assets of Bagley Incorporated in Davis Inc's books.

Transcation 2 : Record the $24,0000 cash paid for professional fees expense.

(b) Assume that Davis issued 139,000 ordinary shares, with a market value of $8.80 per share, to Bagley for its net assets. Legal fees associated with issuing these shares amounted to $7,400 and were paid in cash. Davis had 159,000 shares outstanding prior to the takeover.

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

Transcation 1 : Record the acquisition of net assets of Bagley Incorporated in Davis Inc's books.

Transcation 2 : Record the payment of $7,400 legal fees for the issue of 139,000 equity shares at a market value of $8.80 per share.

Transcation 3 : Record the $21,000 cash paid for professional fees expense.

(ii) Prepare the statement of financial position of Bagley immediately after the sale.

	Bagley Incorporated Statement of Financial Position August 1, Year 4 Assets Liabilities and Equity

Answer 1

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Part a
Acquisition cost		$   1,223,200
Fair value of net assets		$     (958,000)
Goodwill		$       265,200
Journal Entries:
Current assets	$       516,000
Plant and equipment	$   1,062,000
Patents	$         87,000
Goodwill	$       265,200
Current liabilities		$       282,000
Long-term debt		$       425,000
Cash		$   1,223,200
(To record the net acquisition of assets)
Professional fees expense	$         24,000
Cash		$         24,000
(To record the professional fee expense)
Part b
The goodwill calculation is the same as in (a) above because 139,000 shares @ $8.80 per share equals $1,223,200.
(i)
Current assets	$       516,000
Plant and equipment	$   1,062,000
Patents	$         87,000
Goodwill	$       265,200
Current liabilities		$       282,000
Long-term debt		$       425,000
Ordinary shares (13,000 shares x $8.80)		$   1,223,200
(To record the net acquisition of assets)
Ordinary shares	$            7,400
Cash		$            7,400
(To record legal expense)
Professional fees expense	$         21,000
Cash		$         21,000
(To record the professional fee expense)
(ii)
Bagley Corporation
Statement of Financial Position
August 1, Year 4
Shares of Davis Inc.		$   1,223,200
Ordinary shares		$       192,000
Retained earnings (510,000 + 521,200)		$   1,031,200
		$   1,223,200
* gain on sale (1,223,200 – [1,383,000 –399,000 –282,000)