11. The Blue Reef Company purchased the net assets of the Pink Coral Company on January 1, 20X1, and made the following entry to record the purchase:
| Current Assets……………………….. | 100,000 |
| Equipment……………………………. | 150,000 |
| Land ……………………………….. | 50,000 |
| Buildings……………………………. | 300,000 |
| Goodwill ……………………………. | 100,000 |
| Liabilities………………………… | 80,000 |
| Common Stock, $1 Par………………… | 100,000 |
| Paid-in Capital in Excess of Par……… | 520,000 |
Required:
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Make the required entry on January 1, 20X3, for each of the two following independent contingency agreements:
a. An additional cash payment would be made on January 1, 20X3 equal to four times the amount by which average annual earnings of the Pink Coral Division exceed $80,000 per year 20X1 and 20X2. Net income was $112,000 in 20X1 and $140,000 in 20X2.
b. Additional shares would be issued on January 1, 20X3 to compensate for any fall in the value of Blue Reef common stock below $16 per share. The settlement would be to cure the deficiency by issuing added shares based on their fair value on January 1, 20X3. The fair price of the shares on January 1, 20X3 was $10.
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Chapter 1
12. The balance sheet information for Nickel Company is to be used in both parts (a) and (b), each of which is an independent case. On January 1, 20X1, a business combination occurred between Dime Co. and Nickel Co. On this date, a condensed balance sheet for Nickel showed:
……………………..
| Current Assets | Book Value | |||
| $ | 500,000 | |||
| Plant and Equipment (net)…………… | 900,000 | |||
| Intangibles – Patent……………….. | 150,000 | |||
| $1,550,000 | ||||
| ========== | ||||
| Current Liabilities………………… | $ | 75,000 | ||
| Long-Term Debt…………………….. | 225,000 | |||
| Common Stock………………………. | 400,000 | |||
| Paid-in Capital in Excess of Par…….. | 300,000 | |||
| Retained Earning…………………… | 550,000 | |||
| $1,550,000 | ||||
| ========== |
Required:
a. Assume the combination was an asset acquisition in which Dime purchased all of the net assets of Nickel for $1,725,000 cash. Nickel’s current assets were undervalued $70,000; plant and equipment were undervalued $150,000; the patent was undervalued $80,000; and long-term debt was overvalued $45,000.
Record the entry or entries on Dime’s books to carry out the acquisition of the net assets of Nickel.
b. Assume that, in the combination, Dime acquired Nickel’s net assets by issuance of new Dime common stock with a par value of $200,000 and a fair value of $1,750,000. In addition, Dime incurred stock issuance costs of $30,000. For financial accounting purposes, the combination is to be accounted for as a purchase. For tax purposes, the combination is tax-free to the shareholders of Nickel Company. Assume a tax rate of 32%. Current assets of Nickel are undervalued by $70,000. The fair value of Nickel’s plant and equipment was $1,050,000. The intangible is a patent with a fair value equal to book value.
Record the entry or entries on Dime’s books to carry out the acquisition of the net assets of Nickel. Provide supporting calculations.
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