Question

The financial balances for the Atwood Company and the Franz Company as of December 30, 20X1, are presented below. Also included are the fair values for Franz Company's net assets. Atwood Book Value Franz Book Value Franz Fair Value Cash $870,000 $240,000 $240,000 Receivables 660,000 600,000 600,000 Inventory 1,230,000 420,000 580,000 Land 1,800,000 260,000 250,000 Buildings, net 1,800,000 540,000 650,000 Equipment, net 660,000 380,000 400,000 Accounts payable 570,000 240,000 240,000 Accrued expenses 270,000 60,000 60,000 Long-term liabilities 2,700,000 1,020,000 1,120,000 Common stock, $20 oar 1,980,000 Common stock, $5 par 420,000 Additional paid-in capital 210,000 180,000 Retained Earnings, 12/30/X1 1,290,000 520,000 On December 31, 20X1, Atwood issued 50,000 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $10,000 and direct costs of $15,000 were paid. Compute consolidated retained earnings at the date of the acquisition. (Hint: Any costs associated with the acquisition that are expensed would reduce the parent's retained earnings.)

Answer 1

It is the clear case of amalgamation in the nature of merger as the consideration is wholly by way of issue of common stock. In the nature of merger the assets and liabilities are transferred on the book value only, so the fair value of assets and liabilities of Franz Company is of no use.

Consolidated retained earnings will be

Retained earnings of Atwood Company	$1,290,000
Retained Earning of Franz Company	$520,000
Capital of Franz Company ( (420,000*5) + 180,000)	$2,280,000
Less: Sales Consideration (35*50,000)	$1,750,000
Less: Expenses(10000 + 15000)	$25,000
Total	2,315,000