On December 31, 2010, 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 50,000 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, 2011. 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:
| Pacifica | Seguros Book Values | Seguros Fair Values |
Revenues
| $(1,200,000) |
|
|
Expenses | 875,000 |
|
|
Net income | $ (325,000) |
|
|
Retained earnings, 1/1/10 | $ (950,000) |
|
|
Net income | (325,000) |
|
|
Dividends paid | 90,000 |
|
|
Retained earnings, 12/31/10 | $(1,185,000) |
|
|
Cash | $ 110,000 | $ 85,000 | $ 85,000 |
Receivables and inventory | 750,000 | 190,000 | 180,000 |
Property, plant, and equipment | 1,400,000 | 450,000 | 600,000 |
Trademarks | 300,000 | 160,000 | 200,000 |
Total assets | $ 2,560,000 | $ 885,000 |
|
Liabilities | $ (500,000) | $(180,000) | $(180,000) |
Common stock | (400,000) | (200,000) |
|
Additional paid-in capital | (475,000) | (70,000) |
|
Retained earnings | (1,185,000) | (435,000) |
|
Total liabilities and equities | $(2,560,000) | $(885,000) |
|
In addition, Pacifica assessed a research and development project under way at Seguros to have a fair value of $100,000. Although not yet recorded on its books, Pacifica paid legal fees of $15,000 in connection with the acquisition and $9,000 in stock issue costs. Using the acquisition method, prepare the following:
a. 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. (Use a 0.961538 present value factor where applicable.)
b. A postacquisition column of accounts for Pacifica.
c. A worksheet to produce a consolidated balance sheet as of December 31, 2010.
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