Lexington Corporation acquired all of the outstanding common stock of Chalfont, Inc., on January 1, 2016. Lexington gave shares of its no par common stock with a market value of $504 million in exchange for the Chalfont common stock. Chalfont will remain a legally separate entity after the exchange, but Lexington will prepare consolidated financial statements with Chalfont each period. Exhibit 8.22 presents the balance sheets of Lexington and Chalfont on January 1, 2016, just prior to the acquisition. The market value of Chalfont’s fixed assets exceeds their book value by $80 million. Chalfont owns a copyright with a market value of $50 million. Chalfont is a defendant in a lawsuit that it expects to settle during 2016 at a cost of $30 million. The firm carries no insurance against such lawsuits. Lexington plans to establish an acquisition reserve for this lawsuit.
Required:
A. Prepare a schedule that shows the allocation of the
consideration given to individual assets and
liabilities under the acquisition method. Ignore deferred
tax effects. Be sure to use this method for considerations of
assets and liablities:
B. Prepare a consolidated balance sheet for Lexington and Chalfont on January 1, 2016. Show your supporting calculations for any amount that is not simply the sum of the amounts for Lexington and Chalfont from their separate financial records.
Homework Answers
Answer:
a.
Fair value of Chalfont ......................................................................... $ 504
Book value of Chalfont ....................................................................... (300)
Excess ................................................................................................. $ 204
Allocation (Fair value/book value differences):
Fixed assets ......................................................................................... $ 80
Copyright ............................................................................................ 50
Reserve for lawsuit ............................................................................. (30)
Goodwill ............................................................................................. $ 104
b.
Cash..................................................................................................... $ 130
Accounts receivable ............................................................................ 330
Fixed assets ($1,000 + $360 + $80) .................................................... 1,440
Copyright ............................................................................................ 50
Deferred tax asset ................................................................................ 40
Goodwill ............................................................................................. 104
Total assets ............................................................................. $2,094
Accounts payable and accruals ($240 + $80 + $30) ........................... $ 350
Long-term debt.................................................................................... 580
Deferred tax liability ........................................................................... 160
Other noncurrent liabilities ................................................................. 120
Common stock ($320 + $504) ............................................................ 824
Retained earnings ................................................................................ 60
Total equities ........................................................................... $2,094
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