Question

Question #3 (25 marks)

The summary balance sheet of Corrigan Inc. as at December 31, 2019 is as follows:

	Corrigan
Cash	$ 1,000
Accounts Receivable	300
Inventory	520
Property, plant, and equipment	4,000
Accumulated depreciation	(1,800)
	$ 4,020
Current liabilities	$     410
Long term debt	2,160
Common shares	200
Retained earnings	1,250
	$ 4,020

Effective January 1, 2020, Corrigan purchases all of the common shares of Power Co. for $900.  

The balance sheet of Power Co. as at December 31, 2019 is as follows:

	Power
Cash	$   80
Accounts Receivable	160
Inventory	220
Property, plant, and equipment	1,450
Accumulated depreciation	(800)
	$ 1,110
Current liabilities	$  60
Long term debt	300
Common shares	120
Retained earnings	630
	$1,110

In determining the acquisition price, Corrigan noted that Power had brand names with a fair value of $120, its inventory had a fair value of $240, and PP&E a fair value of $600. All other assets and liabilities’ fair values approximated carrying values.

Required:

1. Calculate goodwill to be recorded from the transaction.
2. Prepare the journal entry on Corrigan’s books to record the purchase of the shares on January 1, 2019.
3. A consolidated balance sheet of Corrigan will be prepared post-acquisition as of Jan 1, 2019.
   1. Prepare the consolidation entries:
      1. To eliminate the investment account and establish the acquisition differential
      2. To allocate the acquisition differential
   2. Prepare a consolidation worksheet post acquisition showing
      1. Corrigan carrying values (post acquisition (including (b) above)
      2. Power carrying values
      3. Eliminations : Dr & Cr columns showing entries for (i) above.
      4. Consolidated values for Corrigan

Answer 1

a. Goodwill has been calculated in the following manner :
Goodwill = Value paid for business - Net value of assets acquired
Calculation of net value of assets of Power Ltd.
Particulars	Amount ($)
Cash	80
Brand Names	120
Fair value of inventory	240
Fair Value of PP&E	600
Accounts Receivable	160
Less :
Current Liabilities	60
Long term Debt	300
Value of net assets	840
Therefore, Goodwill = 900 $ - 840 $ = 60 $
b. Journal entry in books of Corrigan to record purchase of business :
		Dr. ($)	Cr. ($)
1	Business Purchase a/c .. Dr	840
	To Power Co. a/c		840
2	Net Assets a/c .. Dr	840
	Goodwill a/c .. Dr	60
	To Business Purchase a/c		900
3	Power Co. A/c .. Dr	900
	To Cash a/c		900
	(Assumed that payment for acquistion was made in Cash)
c. Consolidated balance sheet showing adjustments on account of consolidation is prepared below :
Consolidated Balance Sheet of Corrigan after acquisition
Particulars	Corrigan ($)	Power ($)	Adjustment entries	Total Consolidated Amount in B/S of Corrigan after Consolidation
Cash	1,000	80	-900	180
Brand Names	-	120		120
Accounts Receivable	300	160		460
Goodwill			60	60
Inventory	520	240		760
PP&E	4,000	600		4,600
Less : Accumulated Depreciation	-1,800	-		-1,800
Total Assets				4,380
Current Liabilities	410	60		470
Long term Debt	2,160	300		2,460
Common Shares	200	-		200
Retained Earnings	1,250	-		1,250
Total equity and liabilities				4,380