Question

The July 31, Year 3, balance sheets of two companies that are parties to a business combination are as follows:
In addition to the property, plant, and equipment identified above, Red Corp. attributed a value of $100,000 to Sax’s assembled workforce. They have the knowledge and skill to operate Sax’s manufacturing facility and are critical to the success of the operation. Although the eight manufacturing employees are not under any employment contracts, management of Red was willing to pay $100,000 as part of the purchase price on the belief that most or all of these employees would continue to work for the company.
Effective on August 1, Year 3, the shareholders of Sax accepted an offer from Red Corporation to purchase all of their common shares. Red’s costs for investigating and drawing up the share purchase agreement amounted to $18,000.
Required:
(a) Assume that Red made a $960,000 cash payment to the shareholders of Sax for 100% of their shares.
(i) Prepare the journal entry in the records of Red to record the share acquisition.
(ii) Prepare the consolidated balance sheet of Red Corp. as at August 1, Year 3. Explain the rationale for the accounting for the $100,000 value attributed to Sax’s assembled workforce.
(b) Assume that Red issued 120,000 common shares, with market value of $8 per share to the shareholders of Sax for 100% of their shares. Legal fees associated with issuing these shares amounted to $6,000 and were paid in cash. Red is identified as the acquirer.
(i) Prepare the journal entries in the records of Red to record the share acquisition and related fees.
(ii) Prepare the consolidated balance sheet of Red as at August 1, Year 3.
(c) Assume the same facts as part (b) expect that Red is a private company, uses ASPE, and chooses to use the cost method to account for its investment in Sax.
(i) Prepare the journal entries in the records of Red to record the share acquisition and related fees.
(ii) Prepare the balance sheet of Red as at August 1, Year 3.


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  • CreatedJune 08, 2015
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