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 Liabilities and Equity

(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.)

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

Transaction 2 : Record the $16,000 cash paid for professional fees expense and $4,000 paid for legal fees for issue of shares.

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

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

(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.)

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

Transaction 2 : Record the $16,000 cash paid for professional fees expense and $4,000 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 Liabilities and Equity

Answer 1

Assume that Red made a $960,000 cash payment to the shareholders of Sax for 100% of their shares. Prepare the journal entry in the records of Red to record the share acquisition Investment in Sax Inc. 9,60,000 Didn't include professional fees expense of 18,000 Cash 9,60,000 Prepare the consolidated balance sheet of Red Corp. as at August 1, Year 3 Investment in Sax Inc. (100%) 9,60,000 Carrying Amount of Red Corp.'s Net Assets Assets 12,88,000 Liabilities (266000+374000) 6,40,000 6,48,000 Acquisition Differential 3,12,000 Allocated as follows Current Assets (482000-434000) 48,000 Property, plant and Equipment (986000-854000) 1,32,000 Patents 86,000 Current Liabilities Long-Term Debt 24,000 2,42,000 Goodwill 70,000 Consolidated Balance Sheet August 1, Year 3 Assets Current Assets (1740000+482000-960000) Property, plant and Equipment (1248000+986000) Patents Goodwill Only mistake is not includding professional fees as a deduction to current assets and retained earnings 12,62,000 22,34,000 86,000 70,000 36,52,000 Liabilities Current Liabilities (1500000+266000) Long-Term Debt (494000+398000) 17,66,000 8,92,000 26,58,000 Shareholder's Equity Common Shares Retained Earnings 8,60,000 1,34,000 9,94,000 36,52,000

Assume that Red Corp. Issued 120,000 common shares, with a market value of $8/share to the shareholders of Sax for 100% of their shares Prepare the journal entry in the records of Red to record the share acquisition and related fees Investment in Sax 9,60,000 Didn't include professional fees expense of 18,000 Legal Fees 4,000 Common Shares 9,60,000 Cash 4,000 Prepare the consolidated balance sheet of Red Corp. as at August 1, Year 3 Consolidated Balance Sheet August 1, Year 3 Assets Current Assets (1740000+482000-4000) 22,18,000 If a company is aquired with Property, Plant and Equipment 22,34,000 issuing shares, you are not Patents 86,000 suppose to add the assets to the Goodwill 70,000 consolidated balance sheet. 46,08,000 Everything is put into an Liabilities investment account for the asset Current Liabilities 17,66,000 side and in common shares for Long-Term Debt 8,92,000 the equity side. 26,58,000 Shareholder's Equity Common Shares 18,20,000 Retained Earnings 1,30,000 19,50,000 46,08,000 CORRECTION Assets Current Assets Property, Plant and Equipment Investment in Sax 17,20,000 12,48,000 9,76,000 39,44,000 Liabilities Current Liabilities Long-Term Debt 15,00,000 4,94,000 19,94,000 Shareholder's Equity Common Shares Retained Earnings 18,16,000 1,34,000 19,50,000 39,44,000