Question

Pratt Company acquired all of Spider, Inc.’s outstanding shares on December 31, 2018, for $495,000 cash. Pratt will operate Spider as a wholly owned subsidiary with a separate legal and accounting identity. Although many of Spider’s book values approximate fair values, several of its accounts have fair values that differ from book values. In addition, Spider has internally developed assets that remain unrecorded on its books. In deriving the acquisition price, Pratt assessed Spider’s fair and book value differences as follows:

PRATT COMPANY
Spider, Inc. outstanding stock
acquired by Pratt Company				100%
Cash paid by Pratt for acquisition				$     495,000
Assessment of Spider's fair and book value differences:
			Book	Fair
			Values	Values
Computer software			$       20,000	$       70,000
Equipment			40,000	30,000
Client contracts			-	100,000
In-process research and development			-	40,000
Notes payable			(60,000)	(65,000)
December 31, 2018 Financial Information
			Pratt	Spider
Cash			$       36,000	$       18,000
Receivables			116,000	52,000
Inventory			140,000	90,000
Investment in Spider			495,000	-
Computer software			210,000	20,000
Buildings (net)			595,000	130,000
Equipment (net)			308,000	40,000
Client contracts			-	-
Goodwill			-	-
Total assets			$   1,900,000	$     350,000
Accounts payable			$      (88,000)	$      (25,000)
Notes payable			(510,000)	(60,000)
Common stock			(380,000)	(100,000)
Additional paid-in capital			(170,000)	(25,000)
Retained earnings			(752,000)	(140,000)
Total liabilities and equities			$ (1,900,000)	$    (350,000)

Answer 1

Purchase price and account allocation
	Consideration transferred at fair value	$ 495,000
	Book value	265,000
	Excess fair over book value	230,000	Correct!
	Allocation of excess fair value to
	specific assets and liabilities
	-to Computer software	50,000
	-to Equipment	(10,000)
	-to Client contracts	100,000
	-to In-process research and development	40,000
	-to Notes payable	(5,000)		175,000
	Goodwill	$ 55,000	Correct!

	PRATT COMPANY AND SPIDER, INC.
	Consolidation Worksheet
	December 31, 2018
				Consolidation Entries	Consolidated
	Accounts		Pratt	Spicer		Debit		Credit	Totals
	Cash	$ 36,000	$ 18,000					54,000	Correct!
	Receivables	116,000	52,000					168,000	Correct!
	Inventory	140,000	90,000					230,000	Correct!
	Investment in Spider	495,000	-			[S]	265,000
						[A]	230,000	-	Correct!
	Computer software	210,000	20,000	[A]	50,000			280,000	Correct!
	Buildings (net)	595,000	130,000					725,000	Correct!
	Equipment (net)	308,000	40,000			[A]	10,000	338,000	Correct!
	Client contracts	-	-	[A]	100,000			100,000	Correct!
	R&D assets			[A]	40,000			40,000	Correct!
	Goodwill	-	-	[A]	55,000			55,000	Correct!
	Total assets	$ 1,900,000	$ 350,000					1,990,000	Correct!
	Accounts payable	$ (88,000)	$ (25,000)					(113,000)	Correct!
	Notes payable	(510,000)	(60,000)			[A]	5,000	(575,000)	Correct!
	Common stock	(380,000)	(100,000)	[S]	100,000			(380,000)	Correct!
	Additional paid-in capital	(170,000)	(25,000)	[S]	25,000			(170,000)	Correct!
	Retained earnings	(752,000)	(140,000)	[S]	140,000			(752,000)	Correct!
	Total liabilities and equities	$ (1,900,000)	$ (350,000)		510,000		510,000	(1,990,000)	Correct!
						Correct!		Correct!

PRATT COMPANY AND SUBSIDIARY
Consolidated Balance Sheet
December 31, 2018
Assets
Cash	$ 54,000
Receivables	168,000
Inventory	230,000
Computer software	280,000
Buildings (net)	725,000
Equipment (net)	338,000
Client contracts	100,000
Research and development asset	40,000
Goodwill	55,000
Total assets	$ 1,990,000	Correct!
Liabilities and Owners' Equity
Accounts payable	$ 113,000
Notes payable	575,000
Common stock	380,000
Additional paid-in capital	170,000
Retained earnings	752,000
Total liabilities and equities	$ 1,990,000	Correct!