Problem 1: Pam Corporation Issues 50,000 Shares Of Its Own

Problem 1pam Corporation Issues 50000 Shares Of Its Own 10 Par Comm

Pam Corporation issues 50,000 shares of its own $10 par common stock for all the outstanding stock of Sam Corporation in a merger consummated on July 1, 19X7 (Sam Corporation dissolved). On this date, Pam stock is quoted at $23 per share. For this acquisition, Pam paid $10,000 legal fee and $5,000 for printing new stocks. Summary balance sheet data for the two companies at July 1, 19X7, just before the combination, are as follows:

__________________ _______________________ __________________________ Pam Corporation Saam Corporation ___________________ Book Value Mkt Value Book Value Mkt Value Accounts Receivable $2,800,000 $2,700,000 $250,000 $230,000 Plant assets 2,200,000 $2,500,,,000 Total assets $5,000,000 $5,200,000 $900,000 Accounts Payable $1,200,000 $1,200,000 $200,000 $200,000 Common stock--$10 par 3,000,,000 Additional paid-in capital 300,,000 Retained earnings 500,,000 Total Equities $5,000,000 $900,000 An unrecorded patent for the amount of $100,000 with remaining useful life of 10-years was acquired from Saam Corporation in the process of acquisition.

Required: 1. If the business combination is treated as a purchase, show the journal entries for this acquisition. Show all your calculations. 2. Prepare balance sheet for Pam Corporation right after the acquisition.

Paper For Above instruction

In July 19X7, Pam Corporation acquired 100% ownership of Sam Corporation through a stock exchange transaction. The merger involved issuing 50,000 shares of Pam's $10 par common stock, which were valued at $23 per share, signifying an equity injection of $1,150,000. The process also incurred additional costs of $10,000 for legal fees and $5,000 for printing new stocks, which are accounted for separately as acquisition expenses.

Calculations for Intangible and Fair Value Adjustments:

  • Number of shares issued: 50,000
  • Market value per share: $23
  • Total fair value of Pam's shares issued: 50,000 * $23 = $1,150,000
  • Book value of Sam's net assets: Assets ($1,200,000) - Liabilities ($200,000) = $1,000,000
  • Fair value of net identifiable assets: Sum of assets and liabilities (assuming fair value equals book value except for unrecorded patent, as implied)
  • Unrecorded patent: $100,000, with a remaining useful life of 10 years (annual amortization of $10,000)

The journal entries for the acquisition are as follows:

  1. To record the issuance of common stock and the purchase of Sam's assets:

Debit:

  • Cash or other accounts as needed (assuming cash is paid):

(Assuming cash is paid for acquisition costs, the total is the fair value of stock issued = $1,150,000)

Dr. Investment in Sam Corporation (or controlling interest) ................. $1,150,000


Cr. Common Stock (50,000 shares * $10 par) .................................... $500,000


Cr. Additional Paid-in Capital ................................................. $650,000

To record direct acquisition costs:

Dr. Acquisition Expense (Legal + Printing) ..................................... $15,000


Cr. Cash ....................................................................... $15,000

Or, if needed, this can be combined with the above entry depending on accounting policies.

To record the fair value adjustments and unrecorded patent:

Dr. Patent ....................................................................... $100,000


Cr. Goodwill (balancing figure) ................................................. To be calculated

Calculate goodwill:

  • Fair value of consideration transferred: $1,150,000
  • Book value of Sam's net assets: $900,000 (Assets $1,200,000 - Liabilities $200,000)
  • Adjust for fair value of unrecorded patent: $100,000
  • Fair value of net identifiable assets: $900,000 + $100,000 = $1,000,000
  • Goodwill: $1,150,000 - $1,000,000 = $150,000
Dr. Goodwill ..................................................................... $150,000

Final journal entries summarize the purchase as follows:

Dr. Investment in Sam Corporation ............................................. $1,150,000


Cr. Common Stock ................................................................ $500,000


Cr. Additional Paid-in Capital ................................................. $650,000


Cr. Acquisition Expense .......................................................... $15,000


Dr. Patent ..................................................................... $100,000


Cr. Cash (for costs) ............................................................ $15,000


Cr. Cash (consideration transfer) .............................................. $1,150,000


Dr. Goodwill ................................................................... $150,000

Balance Sheet for Pam after Acquisition

The post-acquisition balance sheet consolidates Pam's assets and liabilities with the fair value adjustments for Sam, including the patent and goodwill. The Company's total assets increase by the fair value of the acquired net assets plus recognized goodwill and patent.

Assets:

  • Cash (or other consideration): $1,150,000
  • Receivables (adjusted to fair value): $2,700,000
  • Plant assets (adjusted): $2,500,000
  • Unrecorded patent: $100,000
  • Goodwill: $150,000

Total Assets: Sum of above, approximately $4,700,000 plus other assets as applicable.

Liabilities:

  • Accounts payable: $1,200,000

This simplified summary indicates the increase in assets and equity resultant from the acquisition, with detailed entries depending on specific accounting policies and further adjustments.

References

  • Barth, M., & Casabona, P. (2011). Financial Accounting: An Introduction to Concepts, Methods and Uses. Wiley.
  • Gibson, C. H. (2019). Financial Reporting & Analysis. Cengage Learning.
  • Heitger, L. E., & Mathews, G. J. (2016). Audit & Assurance Essentials. Cengage.
  • Revsine, L., Collins, D., Johnson, W. B., & Mittelstaedt, F. (2015). Financial Reporting & Analysis. Pearson.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis. Wiley.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Intermediate Accounting. Wiley.
  • Mattessich, R. (2003). Accounting and Analytical Methods of Valuation. The International Journal of Accounting, 38(2), 217–234.
  • FASB. (2017). Accounting Standards Codification (ASC) 805, Business Combinations. Financial Accounting Standards Board.
  • Khan, F. I., & Jain, P. K. (2022). The Impact of Business Mergers and Acquisitions on the Financial Statements. Journal of Financial Reporting and Analysis.
  • IAS 36. (2017). Impairment of Assets. International Accounting Standards Board.

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