Starters Of Income And Net Sales Interest Revenue Total Reve

Starerrenrs Of Lncome Andnet Saleslnterest Revenuetotal Revenuecos

Starerrenrs Of Lncome Andnet Saleslnterest Revenuetotal Revenuecos

Starerrenrs of lncome and Net Sales lnterest Revenue Total Revenue Cost of Goods Sold Gross Margin _ Operating Expenses lnterest Expense lncome Tax Expense Total Expenses Net lncome Beginning Retained Earnings Less: Dividends Ending Retained Earnings Retained Earnings 1,000,,000 1,010,,,,000 45,000 ,72,AOO 277,AO,,d0-390,,,000 35,000 20,q0,0.q,000 The December 31 ,2A1A, currqnt fair values of Starr Company's identifiable assets and liabilities were the same aS their carrying amounts, except for the assets listed below, 6s,,0Pq - (25,,,,000 @@ Bmk Value lnventories Plant Assets (net) Patent (netX5 yr. life) Fair Value 1U3Ub1A 1ilX1t,000 'r20,,,000 35,000 25,000 REQUIRED:\. Prepare the required journal entries to record the business com bination at December 31 , zUA.

REQUIRED: Prepare the December 31,2010 required elimination entry and post this entry to a "Consolidated Balance Sheet Workpapef' you create. Prepare a Consolidated Balance Sheet at December 31, 2010 in good form. 10,000 70,000 On December 31 , 2010, Palm Corporation issued 10,000 shares of its $10 par commons stock (current fair value $50 a ehare) to stockholders of Starr Company for all the outstanding $5 par common stock of Starr. There was no contingent consideration. Out of pocket costs of the business combination paid by Palm on December 3'l,2010, consisted of: finder's and legal fees, $50,000; and costs associated with the SEC registration statement for Palm common stock $30,000.

Both companies use the same accounting principles and procedures. The effective income tax rate for each company was 40%, but you may ignore income tax effects. Financial statements of Palm Corporation and Starr Com pany for the year ended December 3'1 , 2010, prior to the consummation of a purchase type business combination, follow: Balance Sheers Assets Cash lnventories Other Current Assets Receivable from Starr Co. Plant Assets - Net Patent (Net) Total Assets Liabilities and Stockholders' Payable to Palm Corporation lncome Taxes Payable Other Liabilities Common Stoek, $10 par Common Stock, $5 par Additional Paid in Capital Retained Earnings Total Liabilities and Stockholders' Equity Palm Corporation &parate Financial Stat€rnents {Prls For Year Ended Palm Corp 120,,,,,000 and Starr Gompany to purcha!+type budness cornbination) December 31,2010 Starr Co. 35,,000 85,,000 25,,,000 Equity 25,,,,,,,,000 95,,000 " 60,,,000

Paper For Above instruction

The task involves consolidating the financial statements of Palm Corporation and Starr Company following a purchase-type business combination. The process begins by recording necessary journal entries to recognize the acquisition at December 31, 2010, based on the fair values of the identifiable assets and liabilities of Starr. The fair value adjustments include inventories, plant assets, and patents, with some assets exceeding their book values and others needing adjustment. Furthermore, the elimination entry requires adjustments for intercompany balances, unrealized profits, and other consolidation adjustments. It also involves preparing a consolidated balance sheet that accurately reflects the combined financial position of the entities after the acquisition, considering the issuance of Palm's stock for Starr's equity. Costs associated with the acquisition, including legal and registration fees, should be accounted for appropriately. The final task is to present a comprehensive and well-structured consolidated balance sheet as of December 31, 2010, ensuring correct consolidation procedures are applied in line with accounting standards, ignoring income tax effects as specified.

Full Paper Answer

The acquisition of Starr Company by Palm Corporation represents a significant transaction that requires meticulous accounting procedures to accurately reflect the combined financial position. This process involves initial recording of the purchase, recognition of fair value adjustments, elimination of intercompany balances, and the creation of a consolidated balance sheet that portrays the financial status of the new, unified entity.

Initial Journal Entries to Record Business Combination

On December 31, 2010, Palm issued 10,000 shares at a fair value of $50 each to acquire all of Starr’s outstanding common stock, which has a par value of $5. The total consideration paid by Palm for Starr amounts to $500,000 (10,000 shares x $50 per share). As the transaction involves issuing Palm shares for Starr's equity, the acquisition is treated as a purchase, requiring recognition of the fair value of the consideration transferred, identification of the net assets acquired, and recognition of goodwill or gain from a bargain purchase, if applicable.

The initial journal entry to record the acquisition is as follows:

Debit:


- Identifiable assets at fair value:


- Inventories: $110,000 (book value $85,000 + fair value adjustment of $25,000)


- Plant Assets (net): $120,000 (book value) + adjustment of $70,000 (since fair value exceeds book by this amount)


- Patent (net): $35,000 (book value) – no adjustment specified


- Total identifiable assets at fair value, comprising adjusted amounts.


Credit:


- Liabilities assumed at fair value, lumped into total liabilities of Starr.


- Common Stock of Starr: $5 par value x number of shares outstanding (exact number not specified, assume to match the acquisition).


- Cash received / consideration transferred: $500,000 (value of Palm's stock issued)


- Additional Paid-in Capital (APIC) reflects the excess over par value for the recognized shareholder's equity.


The actual journal entries depend on detailed calculations of net assets at fair value, but broadly, Palm recognizes the acquired assets and liabilities at their fair values, proportionally allocated, with the excess paid over net identifiable assets recorded as goodwill.

Since actual amounts of Starr’s outstanding shares are not explicitly provided, assume the entire equity is acquired with the stock issuance, and goodwill is computed as the difference between consideration transferred and fair value of net identifiable assets.

The entries also recognize the issuance of Palm’s stock and the costs paid for acquisition, such as legal and registration expenses, which are expensed as incurred under current accounting standards.

Elimination Entry and Post-Closing Adjustments

At December 31, 2010, an elimination entry is necessary to remove intercompany balances, reconcile equity accounts, and reflect the consolidation adjustments for fair value differences. The key steps include:

  • Eliminating the investment in Starr against the equity acquired.
  • Adjusting inventory, plant assets, and patents to fair value, with corresponding entries to increase or decrease asset accounts and recognize revaluation surpluses or deficits.
  • Eliminating intercompany receivables and payables, notably the receivable from Starr in Palm’s books and the payable in Starr’s books.
  • Eliminating the investment account against Starr's equity and recognizing the non-controlling interest if any.

The consolidation worksheet will include adjustments to eliminate intra-group transactions and to reflect the fair value adjustments, capitalized goodwill or gain, and the non-controlling interest, if applicable.

Post-elimination, the consolidated balance sheet will encompass combined assets and liabilities, adjusted for fair value and consolidation entries. It should also include the issuance of Palm's stock for Starr’s equity, recorded at fair value of $50 per share, impacting common stock and additional paid-in capital accounts.

Constructing the Consolidated Balance Sheet

The consolidated balance sheet as of December 31, 2010, will exhibit total assets, liabilities, and equities aggregating the individual statements, adjusted for fair value modifications and elimination entries. The major components include:

  • Cash and current assets combined from both companies.
  • Inventories increased by fair value adjustments.
  • Plant assets reflecting updated fair values, net of depreciation adjustments if applicable.
  • Patents accounted for at fair value, with subsequent amortization over five years.
  • Liabilities, including accounts payable, wages payable, and other obligations, aggregated and adjusted for fair value changes.
  • Equity accounts, including common stock, additional paid-in capital, and retained earnings, adjusted for the investment transaction and net income allocations.

Accounting for acquisition costs involves deducting out-of-pocket expenses related to legal and SEC registration fees from the total consideration or expensing them immediately, depending on standards applied. In this scenario, expenses amounting to $80,000 (finder’s, legal, and registration) are expensed as incurred, impacting net income for 2010, but not affecting the acquisition accounting directly.

Conclusion

Consolidating the financial statements following a purchase involves rigorous adjustments to ensure that the combined financial position accurately reflects the economic reality of the newly formed entity. Recognizing fair value adjustments, eliminating intra-group transactions, and properly allocating the purchase price are critical steps in producing meaningful consolidated financial statements. Although complex, these steps yield insights into the true financial health and performance of the corporate group, serving as a foundation for stakeholder decision-making and compliance with accounting standards.

References

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