On January 1, 2013, Houston Inc., a public company located in Toronto that imports and distributes various teas and tea products and accessories, acquired all of the common shares of Persia Enterprises. Persia Enterprises operates a chain of cafés and restaurants in the Maritimes and had been reluctant to purchase products from Houston Inc.

The price paid was $1,234,299 and was paid in cash on the day of acquisition. In addition to diversifying its operations, Houston Inc. is planning to start selling its products to Persia Enterprises for use in its cafés and restaurants.

The assets and liabilities of Persia Enterprises as at the acquisition date was as follows:

The leases of Persia Enterprises expire on average within five years. The company was able to sign and secure favourable leases during a time when not many businesses were doing so.
You have been hired by Houston Inc. to help within the accounting and finance department. With the acquisition of Persia Enterprises, Houston's employees have become overwhelmed with the additional work and most are not up to date with current accounting for business acquisitions and what happens subsequent to the acquisition. Houston has also been subject to additional requirements from its bank and other creditors who loaned Houston the funds to acquire Persia. Management is particularly concerned with the effects of this transaction being recorded correctly as they are looking to acquire additional companies in the near future and their financial statements will be heavily analyzed and scrutinized.
Subsequent to the acquisition date, Persia Enterprises opened a new café on the main floor of a building owned by Houston. The rent expense for the year was $125,000. On October 31, 2013, Houston Inc. was presented with an opportunity to acquire a shipment of rare and desirable teas. However, the supplier wanted to be paid in cash on delivery. Since Houston did not have sufficient cash on hand at that time, Persia Enterprises loaned it the $225,000 required, bearing zero interest, to be repaid on January 31, 2014.
Also subsequent to the acquisition date, Houston sold $450,000 of products to Persia Enterprises, which had a cost of $250,000. As at December 31, 2013, $300,000 still remained on hand by Persia. The tax rate for both entities is 30%. Houston Inc.'s net income for the year was $862,349 and that of Persia Enterprises was $422,325.
Exhibit C4-3(a) contains the statement of financial position of Houston Inc. as at December 31, 2013. Exhibit C4-3(b) contains the statement of financial position of Persia Enterprises as at December 31, 2013.
Required
Prepare a report that analyzes the effects that the acquisition of Persia Enterprises has on Houston Inc.
EXHIBIT C4-3(a)
STATEMENT OF FINANCIAL POSITION
Houston Inc.
As at December 31, 2013
Cash ..................... $ 119,247
Trade and other receivables .......... 501,248
Inventory .................. 642,941
Prepaids .................. 124,998
Other current assets ............. 99,481
Total current assets ...............$1,487,915
Property, plant, and equipment (net) ........ $ 692,019
Intangible assets (net) ............... 324,102
Investment in Persia Enterprises (at cost) ....... 1,234,299
Total non-current assets .............$2,250,420
Total assets ..................$3,738,335
Liabilities and shareholder€™s equity
Accounts payable ................$ 449,227
Other payables ................ 201,992
Payable to Persia Enterprises .......... 225,000
Total liabilities .................$ 876,219
Retained earnings ................ $2,762,116
Common shares ............... 100,000
Total liabilities and shareholder€™s equity ......$3,738,335
EXHIBIT C4-3(b)
STATEMENT OF FINANCIAL POSITION
Persia Enterprises
As at December 31, 2013
Cash ....................$ 119,688
Inventory .................. 388,091
Prepaids ................... 199,201
Other current assets ............... 47,192
Receivable from Houston Inc. ........... 225,000
Total assets ..................$ 979,172
Liabilities and shareholder€™s equity
Accounts payable .................$ 325,933
Retained earnings ................ 553,239
Common shares ................ 100,000
Total liabilities and shareholder€™s equity .......$ 979,172

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Book Value $376,019 $256,103 Fair Value Inventory Prepaid expenses Favourable leases Accounts payable Net assets $425,174 $256,103 $375,103 $401,208 $655,172 $401,208 $230,914