Sandstone Corporation has the following account balances and respective fair values on June 30:

Patriot, Inc., obtained all of the outstanding shares of Sandstone on June 30 by issuing 20,000 shares of common stock having a $1 par value but a $75 fair value. Patriot incurred $10,000 in stock issuance costs and paid $75,000 to an investment banking firm for its assistance in arranging the combination. In negotiating the final terms of the deal, Patriot also agrees to pay $100,000 to Sandstone’s former owners if it achieves certain revenue goals in the next two years. Patriot estimates the probability adjusted present value of this contingent performance obligation at $30,000.

a. What is the fair value of the consideration transferred in this combination?b. How should the stock issuance costs appear in Patriot’s postcombination financial statements?c. How should Patriot account for the fee paid to the investment bank?d. How does the issuance of these shares affect the stockholders’ equity accounts of Patriot, the parent?e. How is the fair value of the consideration transferred in the combination allocated among the assets acquired and the liabilities assumed?f. What is the effect of Sandstone’s revenues and expenses on consolidated totals? Why?g. What is the effect of Sandstone’s Common Stock and Additional Paid-In Capital balances on consolidated totals?h. If Patriot’s stock had been worth only $50 per share rather than $75, how would the consolidation of Sandstone’s assets and liabilities have been affected?

Transcribed Image Text:

Receivables.. Patented technology Computer software.. In-process research and development Liabilities Common stock Additional paid-in capital Retained earnings deficit, 1/1 Revenues Expenses. Book Values $ 80,000 100,000 -0- (400,000) (100,000) (300,000) 700,000 (300,000) 220,000 Fair Values $ 80,000 700,000 500,000 300,000 (400,000)