Kaplan AC 450 Advanced Accounting Unit 2 Problem 2-28

Problem 2-28 [LO4, LO5, LO6, LO7, LO8]

On January 1, 2013, NewTune Company exchanges 18,688 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 $35,250 in stock registration and issuance costs in connection with the merger.

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

           Book

         Values      Fair

       Values

  Receivables$51,750$49,150 

  Trademarks96,000267,750 

  Record music catalog84,500240,500 

  In-process research and development0265,500 

  Notes payable(72,000)(63,750)

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Precombination January 1, 2013, book values for the two companies are as follows:

      NewTuneOn-the-Go

  Cash$70,000$41,000 

  Receivables140,00051,750 

  Trademarks418,00096,000 

  Record music catalog931,00084,500 

  Equipment (net)333,000138,000

  Totals$1,892,000$411,250 

  Accounts payable$(113,000)$(38,250)

  Notes payable(467,000)(72,000)

  Common stock(400,000)(50,000)

  Additional paid-in capital(30,000)(30,000)

  Retained earnings(882,000)(221,000)

  Totals$(1,892,000)$(411,250)

Note: Parentheses indicate a credit balance.

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. (Input all amounts as positive values.)

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. (Leave no cells blank - be certain to enter "0" wherever required. Enter the consolidation entries of 'Investment in On-the-Go, Inc.' in order of (S) Elimination of subsidiary’s stockholders’ equity and (A) Allocation of On-the-Go's consideration fair value in excess of book value. Input all amounts as positive values.)