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 values 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: Seguros Book Seguros Fair Values Values Pacifica $(1,810,000) 1,267,000 $ (543,000) $(1,031,000) (543,000) 96,000 $(1,478,000) $ 198,000 267,000 2,000,000 398,000 $ 2,863,000 $ (510,000) (400,000) (475,000) (1,478,000) $(2,863,000) 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 $ 134,000 74,400 598,500 299,000 $ 134,000 89,000 446,000 240,000 $ 909,000 $ (204,000) (200,000) (70,000) (435,000) $ (909,000) $ (204,000) In addition, Pacifica assessed a research and development project under way at Segurosto 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 post acquisition column of accounts for Pacifica and the consolidated balance sheet as of the acquisition date

Record the acquisition of Seguros Company.

Record the legal fees related to the combination.

Record the payment of stock issuance costs.

Answer 1

a)	Account	Debit	credit
	Investment in seguros	$1,096,400
	Common stock (51695*5)		258475
	Additional paid in capital(51695*15)		775425
	(contingent consideration=130000*50% probability*.961538 present value factor)		$62,500
	(being seguros acquired)
	combination expense	$15,200
	cash		$15,200
	(expenses incurred for acquistion)
	additional paid in capital	$11,200
	cash		$11,200
	(expenses incurred for acquistion)
b) and c)		Pacifica	Seguros	consolidation	entries	consolidation balane sheet
	revenue	$1,810,000				$1,810,000
	Expense	1282200				1282200
	Net income	$527,800				$527,800
	retained earnings(1/1)	$1,031,000				$1,031,000
	Net income	527800				527800
	dividend paid	($96,000)				$96,000
	retained earnings(12/31)	$1,654,800				$1,462,800
	cash	171600	134000			305600
	receivables and inventory	267000	$89,000		14600	$341,400
	property plant and equipment	2000000	446000	152500		2598500
	investment in seguros	$1,096,400
	research and development			100000
	goodwill			77700
	trademarks	398000	240000	59000
	total assest	3933000	$909,000
	Liabilities	510000	204000			510000
	contigent obligation	62500				62500
	common stock	658475	200000	200000		400000
	additional paid in capital	1239225	70000	70000		1239225
	retained earnings	1462800	435000	435000		1462800
	Total liabilities and equity	3933000	909000