Patterson Company acquired all of Shapiro, Inc.'s outstanding shares on December 31, 2021 for $495,000 by issuing
Question:
Patterson Company acquired all of Shapiro, Inc.'s outstanding shares on December 31, 2021 for $495,000 by issuing $200,000 in long-term liabilities and paying $295,000 in cash. Patterson also paid in cash, $45,000, for legal and accounting fees associated with the acquisition.
Several of Shapiro’s accounts have fair values that differ from book values. Shapiro has also internally developed assets that remain unrecorded on its books (i.e., book value equals zero, but fair value is non-zero). Its remaining assets and liabilities have book values equal their fair values. The assets and liabilities with fair value and book value differences are reported as follows:
Book Values Fair Values
Computer software $ 20,000 $ 70,000
Equipment $ 40,000 $ 30,000
Client contracts $ - $ 100,000
In-process research and development $ - $ 40,000
Notes payable $ (60,000) $ (65,000)
On December 31, 2021, the pre-combination book values of both companies are as follows.
Patterson Shapiro
Cash $ 531,000 $ 18,000
Receivables $ 116,000 $ 52,000
Inventory $ 140,000 $ 90,000
Computer software $ 210,000 $ 20,000
Buildings (net) $ 595,000 $ 130,000
Equipment (net) $ 308,000 $ 40,000
Total assets $ 1,900,000 $ 350,000
Accounts payable $ (88,000) $ (25,000)
Notes payable $ (510,000) $ (60,000)
Common stock $ (380,000) $ (100,000)
Additional paid-in capital $ (170,000) $ (25,000)
Retained earnings $ (752,000) $ (140,000)
Total liabilities and equities $ (1,900,000) $ (350,000)
Assume that no dissolution takes place in connection with this combination. Patterson will operate Shapiro as a wholly owned subsidiary with a separate legal and accounting identity. Both companies retain their separate legal identities. Prepare the following:
Journal entries to record the business combination in Patterson’s book.
