Question

Problem 1:

On January 2, 2020 Palta Company issued 80,000 new shares of its $5 par value common stock valued at $12 a share for all of Sudina Corporation's outstanding common shares. Palta paid $5,000 for the direct combination costs of the accountants. Palta paid $18,000 to register and issue shares. The fair value and book value of Sudina's identifiable assets and liabilities were the same. Summarized balance sheet information for both companies just before the acquisition on January 2, 2020 is as follows:

                                                                                 Book-Value=

         Book-Value            Fair-Value

                                                                  Palta               Sudina

Cash                                                      $75,000              $60,000

Inventories                                            160,000              200,000

Other current assets                               200,000              250,000

Land                                                     175,000              125,000

Plant assets-net                                    1,500,000              750,000

Total Assets                                       $2,110,000           $1,385,00

Accounts payable                                 $100,000            $155,000

Notes payable                                        700,000              330,000

Capital stock, $2 par                               600,000              250,000

Additional paid-in capital                       450,000               50,000

Retained Earnings                                   260,000              600,000

Total Liabilities & Equity                    $2,110,000         $1,385,000

Required:

1. Prepare the entry to record the issuance of the 80,000 shares.
2. Prepare the entry to record the $5,000 payment for the direct costs.
3. Prepare the entry to record the $18,000 payment to register and issue the stock shares.
4. Prepare the entry to dissolve Sudina as a separate legal entity
5. How would part 4.) change if only 70,000 shares had been issued.

Answer 1

Journal entry to dissolve Sudina as a separate legal entity (80,000 shares issued)

Particulars	Accounts Titles and Explanations	Ref	Debit	Credit
01-02-2020	Cash Inventories Other current assets Land Plant assets -net Goodwill (working note - 1) Common stock (80,000 shares X $ 5) Additional Paid in capital (80,000 X ($12-$5) Accounts payable Notes payable (To record investment made in Sudhina)		$ 60,000 $ 200,000 $ 250,000 $ 125,000 $ 750,000 $ 60,000	$ 400,000 $ 560,000 $ 155,000 $ 330,000
01-02-2020	Investment Cash (To record payment of direct cost)		$ 5,000	$ 5,000
01-02-2020	Additional paid in capital Cash (To records registration fees paid)		$ 18,000	$18,000

Working Note – 1

Calculation of Goodwill or Capital Reserve

particulars	Amount	Amount
Consideration (80,000 shares X $12 each)		$ 960,000
Less: Book value of assets and liabilities of Sudhina
Assets
a) Cash	$ 60,000
b) Inventories	$ 200,000
c) Other current assets	$ 250,000
d) Land	$ 125,000
e) Plant assets -net	$ 750,000
Liabilities
f) Accounts payable	($ 155,000)
g) Notes payable	($ 330,000)
h) Total		($ 900,000)
i) Goodwill		$ 60,000

Journal entry to dissolve Sudina as a separate legal entity  (70,000 shares issued)

Particulars	Account Titles and Explanations	Ref	Debit	Credit
01-02-2020	Cash Inventories Other current assets Land Plant assets -net Capital reserve (Working note - 2) Common stock (70,000 shares X $ 5) Additional Paid in capital (70,000 X ($12-$5) Accounts payable Notes payable (To record investment made in Sudhina)		$ 60,000 $ 200,000 $ 250,000 $ 125,000 $ 750,000	$ 60,000 $ 350,000 $ 490,000 $ 155,000 $ 330,000
01-02-2020	Investment Cash (To record payment of direct cost)		$ 5,000	$ 5,000
01-02-2020	Additional paid in capital Cash (To records registration fees paid)		$ 18,000	$18,000

Working Note – 2

Calculation of Goodwill or Capital Reserve

particulars	Amount	Amount
Consideration (70,000 shares X $12 each)		$ 840,000
Less: Book value of assets and liabilities of Sudhina
Assets
a) Cash	$ 60,000
b) Inventories	$ 200,000
c) Other current assets	$ 250,000
d) Land	$ 125,000
e) Plant assets -net	$ 750,000
Liabilities
f) Accounts payable	($ 155,000)
g) Notes payable	($ 330,000)
h) Total		($ 900,000)
i) Capital reserve		$ 60,000