Question

On December 31, Pacifica, Inc., acquired 100 percent of the voting stock of Seguros Company. Pacifica will maintain Seguros as a wholly owned subsidiary with its own legal and accounting identity. The consideration transferred to the owner of Seguros included 51,695 newly issued Pacifica common shares ($20 market value, $5 par value) and an agreement to pay an additional $130,000 cash if Seguros meets certain project completion goals by December 31 of the following year. Pacifica estimates a 50 percent probability that Seguros will be successful in meeting these goals and uses a 4 percent discount rate to represent the time value of money. Immediately prior to the acquisition, the following data for both firms were available: Revenues Expenses Net income Retained earnings, 1/1 Net income Dividends declared Retained earnings, 12/31 Cash Receivables and inventory Property, plant, and equipment Trademarks Total assets Liabilities Common stock Additional paid-in capital Retained earnings Total liabilities and equities Seguros Seguros Book Fair Pacifica Values Values $(1,810,000) 1,267,000 $ (543,000) $(1,031,000) (543,000) 96,000 $(1,478,000) $ 198,000 $ 134,000 $ 134,000 267,000 89,000 74,400 2,000,000 446,000 598,500 398,000 240,000 299,000 $ 2,863,000 $ 909,000 $ (510,000) $ (204,000) $ (204,000) (400,000) (200,000) (475,000) (70,000) (1,478,000) (435,000) $(2,863,000) $ (909,000) In addition, Pacifica assessed a research and development project under way at Seguros to have a fair value of $106,000. Although not yet recorded on its books, Pacifica paid legal fees of $15,200 in connection with the acquisition and $11,200 in stock issue costs. a. Prepare Pacifica's entries to account for the consideration transferred to the former owners of Seguros, the direct combination costs, and the stock issue and registration costs. b.&c. Present a worksheet showing the postacquisition column of accounts for Pacifica and the consolidated balance sheet as of the acquisition date.

Answer 1

Answer (a.) Journal Entries

Transaction	Account Title and Explanation	Debit $	Credit $
1	Investment in Seguros	1,096,400
	Common Stock (51,695*$5)		258,475
	Additional Paid-In Capital (51,695*$15)		775,425
	Contingent performance obligation (130,000*50%*0.961538)		62,500
	(To record the acquisition of Seguros company)
2	Professional Services Expense	15,200
	Cash		15,200
	(To record legal fees paid in connection with acquisition)
3	Additional Paid-In Capital	11,200
	Cash		11,200
	(To record stock issue cost in connection with acquisition)

Answer (b.&c.)

	Pacifica	Seguros	Consolidation Entries	Consolidated Balance Sheet
Revenues	(1,810,000)				(1,810,000)
Expenses	1,267,000				1,267,000
Net income	(543,000)				(543,000)
Retained earnings, 1/1	(1,031,000)				(1,031,000)
Net income	(543,000)				(543,000)
Dividends declared	96,000				96,000
Retained earnings, 12/31	(1,478,000)				(1,478,000)
Cash	198,000	134,000			332,000
Receivables and inventory	267,000	89,000		14,600	341,400
Property, plant and equipment	2,000,000	446,000	152,500		2,598,500
Investment in Seguros	1,096,400			1,096,400	0
Research and development asset			106,000		106,000
Goodwill			88,500		88,500
Trademarks	398,000	240,000	59,000		697,000
Total assets	3,959,400	909,000			4,163,400
Liabilities	(510,000)	(204,000)			(714,000)
Contingent performance obligation	(62,500)				(62,500)
Common stock	(658,475)	(200,000)	200,000		(658,475)
Additional paid-in capital	(1,250,425)	(70,000)	70,000		(1,250,425)
Retained earnings	(1,478,000)	(435,000)	435,000		(1,478,000)
Total liabilities and equities	(3,959,400)	(909,000)	1,111,000	1,111,000	(4,163,400)

(89,000-74,400) = 14,600

(598,500-446,000) = 152,500

(299,000-240,000) = 59,000

(400,000+258,475) = 658,475

(475,000+775,425) = 1,250,425

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