For This Assignment, Use Your Fundamentals Of Advanced Accou ✓ Solved

For this assignment, use your Fundamentals of Advanced Accounting

For this assignment, use your Fundamentals of Advanced Accounting text and the Excel spreadsheet provided on the companion website to complete the following:

Problem 29 on page 82. This problem tests your knowledge of financial statement reporting for consolidated companies. In the spreadsheet, use tab P02-29 for your answers. 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:

  • Computer software: Book Value $20,000, Fair Value $70,000
  • Equipment: Book Value $40,000, Fair Value $30,000
  • Client contracts: Book Value $0, Fair Value $100,000
  • In-process research and development: Book Value $0, Fair Value $40,000
  • Notes payable: ($60,000)

At December 31, 2018, the following financial information is available for consolidation:

  • Pratt Cash: $36,000, Spider Cash: $18,000
  • Pratt Receivables: $116,000, Spider Receivables: $52,000
  • Pratt Inventory: $140,000, Spider Inventory: $90,000
  • Pratt Investment in Spider: $495,000, Spider: $0
  • Pratt Computer software: $210,000, Spider Computer software: $20,000
  • Pratt Buildings (net): $595,000, Spider Buildings (net): $130,000
  • Pratt Equipment (net): $308,000, Spider Equipment (net): $40,000
  • Pratt Client contracts: $0, Spider Client contracts: $0
  • Pratt Goodwill: $0, Spider Goodwill: $0
  • Total assets Pratt: $1,900,000, Spider: $350,000
  • Accounts payable Pratt: ($88,000), Spider: ($25,000)
  • Notes payable Pratt: ($510,000), Spider: ($60,000)
  • Common stock Pratt: ($380,000), Spider: ($100,000)
  • Additional paid-in capital Pratt: ($170,000), Spider: ($25,000)
  • Retained earnings Pratt: ($752,000), Spider: ($140,000)
  • Total liabilities and equities Pratt: $(1,900,000), Spider: $(350,000)

Prepare a consolidated balance sheet for Pratt and Spider as of December 31, 2018.

Problem 33 on page 84. This problem tests your application of the statutory merger method for business combinations. On January 1, NewTune Company exchanges 15,000 shares of its common stock for all of the outstanding shares of On-the-Go, Inc. Each of NewTune’s shares has a $4 par value and a $50 fair value. The fair value of the stock exchanged in the acquisition was considered equal to On-the-Go’s fair value. NewTune also paid $25,000 in stock registration and issuance costs in connection with the merger.

Several of On-the-Go’s accounts’ fair values differ from their book values on this date:

  • Receivables: Book Value $65,000, Fair Value $63,000
  • Trademarks: Book Value $95,000, Fair Value $0
  • Record music catalog: Book Value $60,000, Fair Value $0
  • In-process research and development: Book Value $0, Fair Value $200,000
  • Notes payable: ($50,000)

Precombination book values for the two companies are as follows:

  • NewTune Cash: $60,000, On-the-Go Cash: $29,000
  • NewTune Receivables: $150,000, On-the-Go Receivables: $0
  • NewTune Trademarks: $400,000, On-the-Go Trademarks: $0
  • NewTune Record music catalog: $840,000, On-the-Go Record music catalog: $0
  • NewTune Equipment (net): $320,000, On-the-Go Equipment (net): $105,000
  • NewTune Total: $1,770,000, On-the-Go Total: $354,000
  • NewTune Accounts payable: ($110,000), On-the-Go Accounts payable: ($34,000)
  • NewTune Notes payable: ($370,000)
  • NewTune Common stock: ($400,000)
  • NewTune Additional paid-in capital: ($30,000)
  • NewTune Retained earnings: ($860,000), On-the-Go Retained earnings: ($190,000)
  • NewTune Total: $(1,770,000), On-the-Go Total: $(354,000)

a. Assume that this combination is a statutory merger so that On-the-Go’s accounts will be transferred to the records of NewTune. On-the-Go will be dissolved and will no longer exist as a legal entity. Prepare a postcombination balance sheet for NewTune as of the acquisition date.

b. Assume that no dissolution takes place in connection with this combination. Rather, both companies retain their separate legal identities. Prepare a worksheet to consolidate the two companies as of the combination date.

c. How do the balance sheet accounts compare across parts (a) and (b)?

Paper For Above Instructions

In order to create a consolidated balance sheet for Pratt Company and Spider, Inc. as of December 31, 2018, we start by combining their financial statements while considering fair value adjustments that arise from the acquisition.

Pratt Company acquired all of Spider, Inc.'s outstanding shares on December 31, 2018, for $495,000. As part of the consolidation, Pratt will operate Spider as a wholly owned subsidiary. Thus, the balance sheet will encompass both companies, and fair value adjustments will be accounted for.

Consolidated Balance Sheet of Pratt Company and Spider, Inc. as of December 31, 2018

Assets

  • Cash: $36,000 (Pratt) + $18,000 (Spider) = $54,000
  • Receivables: $116,000 (Pratt) + $52,000 (Spider) = $168,000
  • Inventory: $140,000 (Pratt) + $90,000 (Spider) = $230,000
  • Investment in Spider (not included in consolidation): $0
  • Computer Software: Fair Value Adjustment: $70,000 (Spider) $210,000 (Pratt) + $50,000 (adjustment) = $260,000
  • Buildings: $595,000 (Pratt) + $130,000 (Spider) = $725,000
  • Equipment: $308,000 (Pratt) + $40,000 (Spider) - Fair Value Adjustment of $10,000 = $338,000
  • Client Contracts: Fair Value Adjustment: $100,000 (Spider)
  • In-Process R&D: Fair Value Adjustment: $40,000 (Spider)
  • Total Assets: $54,000 + $168,000 + $230,000 + $260,000 + $725,000 + $338,000 + $100,000 + $40,000 = $ 1,755,000

Liabilities

  • Accounts Payable: $88,000 (Pratt) + $25,000 (Spider) = $113,000
  • Notes Payable: $510,000 (Pratt) + $60,000 (Spider) = $570,000
  • Total Liabilities: $113,000 + $570,000 = $683,000

Equity

  • Common Stock: $380,000 (Pratt) + $100,000 (Spider) = $480,000
  • Additional Paid-In Capital: $170,000 (Pratt) + $25,000 (Spider) = $195,000
  • Retained Earnings: $752,000 (Pratt) + $140,000 (Spider) + Fair Value Adjustment for intangible assets = $892,000
  • Total Equity: $480,000 + $195,000 + $892,000 = $1,567,000

Total Liabilities and Equity = $683,000 (Liabilities) + $1,567,000 (Equity) = $2,250,000

Next, for problem 33, we will address the statutory merger involving NewTune Company and On-the-Go, Inc. On January 1, NewTune exchanged 15,000 shares of its common stock for all of On-the-Go's outstanding shares. Each share has a par value of $4 and a fair value of $50.

The calculation of the fair value of the stock exchanged is as follows:

Number of shares exchanged: 15,000

Fair value per share: $50

Total fair value of shares exchanged: 15,000 * $50 = $750,000

In addition to the shares, NewTune incurred stock registration and issuance costs of $25,000, bringing the total acquisition cost to $775,000. We also recognize the fair value adjustments for On-the-Go's assets and liabilities.

Postcombination Balance Sheet for NewTune

  • Cash: $60,000 (NewTune) + $29,000 (On-the-Go) = $89,000
  • Receivables: $150,000 (NewTune) + $63,000 (On-the-Go) = $213,000
  • Trademarks: $400,000 (NewTune) + $0 (On-the-Go) = $400,000
  • Record Music Catalog: $840,000 (NewTune) + $0 (On-the-Go) = $840,000
  • Equipment: $320,000 (NewTune) + $105,000 (On-the-Go) = $425,000
  • Total Assets: $89,000 + $213,000 + $400,000 + $840,000 + $425,000 = $1,967,000

Liabilities

  • Accounts Payable: $110,000 (NewTune) + $34,000 (On-the-Go) = $144,000
  • Notes Payable: $370,000 (NewTune) + $50,000 (On-the-Go) = $420,000
  • Total Liabilities: $144,000 + $420,000 = $564,000

Equity

  • Common Stock: $400,000 (NewTune)
  • Additional Paid-In Capital: $30,000 (NewTune) + $775,000 total from acquisition costs = $805,000
  • Retained Earnings: $860,000 (NewTune) + $190,000 (On-the-Go) = $1,050,000
  • Total Equity: $400,000 + $805,000 + $1,050,000 = $2,255,000

Total Liabilities and Equity = $564,000 + $2,255,000 = $2,819,000

Worksheet Comparison of Parts (a) and (b)

In comparing part (a) and part (b) of the assignment:

In scenario (a), where On-the-Go is dissolved post-acquisition, NewTune’s balance sheet will reflect all of On-the-Go's assets and liabilities as part of the combined entity. In contrast, scenario (b) retains both entities’ legal identities, potentially requiring a more complex consolidation process and maintaining separate records for analysis.

The variations primarily lie in accounting for combined versus retained identity, which affects how assets and liabilities are recorded, alongside their respective values. Such differences can affect future assessments of financial performance, distribution of profits, and evaluation of financial ratios between the companies.

Conclusion

The preparation of consolidated financial statements and postcombination balance sheets involves careful consideration of asset valuations, liabilities, and the treatment of equity. Understanding these processes is crucial for accurate financial reporting and compliance with accounting standards.

References

  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial Accounting. Wiley.
  • Halper, F. (2020). The Consolidation of Financial Statements. Accounting Today.
  • Graham, B., & Dodd, D. L. (2012). Security Analysis. McGraw-Hill.
  • Wolk, H. I., & Tearney, M. (2017). Accounting Theory: A Conceptual Framework Approach. Cengage Learning.
  • Stickney, C. P., & Weil, R. L. (2010). Financial Reporting, Financial Statement Analysis, and Valuation. Cengage Learning.
  • Chapin, S. J. (2021). Understanding Consolidated Financial Statements. CPA Journal.
  • Financial Accounting Standards Board (FASB). (2020). Statement of Financial Accounting Standards No. 141R.
  • International Financial Reporting Standards (IFRS). IFRS 3 Business Combinations.
  • Hoggett, J. R., Edwards, L., & Gold, A. (2015). Accounting. Cengage Learning.
  • Needles, B. E., Powers, M., & Crosson, S. V. (2018). Financial Accounting. Cengage Learning.

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