Assume That Palm Corporation Had Appropriately Used Purchase

Aesume That Palm Corporation Had Appropriately Used Purchase Accountin

Aseume that Palm Corporation had appropriately used purchase accounting for the December 31, 2010 business combination with its subsidiary, Starr Company. Prepare the journal entries to record the business combination at December 31, 2010. Additionally, prepare the December 31, 2010 required elimination entry and post this entry to a "Consolidated Balance Sheet Worksheet." Finally, develop a consolidated balance sheet at December 31, 2010, in good form.

Paper For Above instruction

The acquisition of Starr Company by Palm Corporation on December 31, 2010, presented a significant corporate event requiring appropriate purchase accounting treatment. This process involves recording the acquisition, consolidating financial statements, and reflecting the new ownership structure in the consolidated balance sheet. The following sections outline the journal entries, eliminations, and the preparation of a consolidated balance sheet following Generally Accepted Accounting Principles (GAAP).

Initial Acquisition Recording

The first step involves recording the purchase of Starr Company's shares by Palm Corporation. Palm issued 10,000 shares of its common stock at a fair value of $50 per share, totaling $500,000. Since Starr's net identifiable assets, including liabilities, are valued at their fair values at acquisition date, the purchase price exceeds the book value, creating goodwill.

The journal entry to record the acquisition includes recording the investment in Starr and recognizing goodwill:

Debit:

• Investment in Starr Company: $500,000
• Goodwill: $165,000

Credit:

• Cash or other consideration paid: $500,000

This figures from the purchase amount, less the fair value of Starr's net identifiable assets, which reflect assets and liabilities at fair value at the acquisition date. Since the fair value of Starr’s net assets exceeds the book value, any excess is allocated accordingly, and goodwill is recognized for the residual.

Elimination Entries at Year-End

Post-acquisition, the consolidations require eliminating intercompany transactions, balances, and investments, to present a unified financial statement. Key eliminations include:

1. Eliminating the investment account against the subsidiary’s equity:

Dr.: Common stock of Starr: $200,000 (40,000 shares × $5 par)

Dr.: Retained earnings of Starr: $260,000 (from balance sheet)

Dr.: Additional paid-in capital, Starr: $30,000

Cr.: Investment in Starr: $500,000

2. Eliminating intercompany receivables/payables and revenues/expenses.

3. Adjusting for fair value differences of identifiable assets, especially inventories, plant assets, and patents, which have different fair values from their carrying amounts:

- Write-up inventory at fair value: $20,000 (from $25,000 to $45,000).

- Write-up plant assets: $70,000 (from $60,000 to $130,000).

- Write-up patent: $10,000 (from $25,000 to $35,000).

4. Recording the adjustment to reflect the acquisition-date fair value of the assets and liabilities, and allocating goodwill accordingly.

Consolidated Balance Sheet Preparation

Using the above eliminations and adjustments, the consolidated balance sheet as of December 31, 2010, includes:

- Total assets combining Palm assets and adjustments for fair value increments on Starr assets.

- Elimination of the investment account.

- Recognition of goodwill.

- Consolidation of liabilities and equity.

Assets:

- Cash and current assets sum of Palm and Starr, adjusted for fair value adjustments.

- Investment in Starr eliminated against Starr's equity.

- Plant assets increased by fair value adjustments.

- Patent adjusted for fair value.

- Goodwill recognized for excess purchase price over fair value net assets.

Liabilities:

- Sum of Palm and Starr liabilities, including intercompany balances.

Stockholders’ Equity:

- Combining common stock and capital accounts, with no double counting of intercompany holdings.

Conclusion

The consolidation process after a purchase business combination involves precise journal entries for initial recognition, elimination of intercompany transactions, adjustments to fair value of identifiable net assets, and the recognition of goodwill. The final consolidated balance sheet presents the unified financial position of the combined entity, reflecting true economic reality and compliance with GAAP standards.

References

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