Question

1. HC Corporation issued 7,000 shares of its $2 par value common stock at a market price of $15 per share to acquire all the outstanding common stock of Barry Corporation. HC paid $2,000 of legal fees for this business combination and $700 for issuing the securities. Barry was merged into HC and dissolved. Information for Barry Corporation immediately before the merger was as follows:

	Book value	Fair value
Cash	2,000	2,000
Building	30,000	27,000
Patents		8,000
Total	32,000	37,000
Accounts payable	5,000	5,000
Common stock	2,000
Add. paid-in capital	10,000
Retained earnings	15,000
Total	32,000

Prepare the journal entries on HC Corporation’s books to account for the business combination.

Answer 1

	Fair value
Cash	$2,000
Building	$27,000
Patents	$8,000
Less: Accounts payable	$5,000
Identifiable Net Assets	$32,000
Fair value of shares issued	$105,000
Goodwill	$73,000	(105,000-32,000)
Account titles and explanation	Debit	Credit
Cash	$2,000
Building	$27,000
Patents	$8,000
Goodwill	$73,000
Account payable		$5,000
Common stock(7000*2)		$14,000
Addition. Paid in capital		$91,000	(7000*13)
(Being business combination accounted)
Legal fees expense	$2,000			Note: As per ASC 805, acquisition related costs does not form part of combination)
Addition. Paid in capital(security issue cost)	$700
Cash		$2,700
(cost incurred accounted)