Purple Door Corporation (PDC) is a large industrial corporation dealing in a wide array of technical products.

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Question:

Purple Door Corporation (PDC) is a large industrial corporation dealing in a wide array of technical products. Silver Nickel Industries (SNI), a smaller competitor, specializes in research and production of solar lights and related products. On April 1, 2020, PDC completed the acquisition of SNI. Prior to the acquisition PDC owned 35% of the SNI outstanding shares which are accounted for using the equity method. Both companies have a December 31 year-end and $0.10 per share par value.

At the acquisition date, PDC has 1,625,800,000 shares outstanding, a share price of $32.60 and a market capitalization of $53 billion. SNI has 228,000,000 shares outstanding. On April 1, 2020, PDC acquires the 148,200,000 shares it did not already hold of SNI by issuing 185,250,000 new PDC shares (or 1.25 PDC shares per SNI share for an effective price of $40.75 per share). PDC also issued 500,000 options to Tom Fisher, the CEO of SNI. Each option has an exercise price of $40.75 and an expiration date of March 31, 2028. The options vest on March 31, 2023 so long as Tom Fisher is still an employee of SNI (or PDC) on this date. The fair value of the options on February 2, 2020 is $4,365,000. PDC will maintain SNI as a wholly owned subsidiary with its own legal and accounting identity.

PDC calculates the fair value of the acquisition at $9,302,735,000 as follows:

79,800,000 SNI shares at $40.75 $3,251,850,000

185,250,000 PDC shares at $32.60 6,039,150,000

500,000 options 6,865,000

Cash 8,370,000

TOTAL: $9,306,235,000

The cash amount was paid to a CPA firm ($6,760,000) for due diligence work related to the acquisition and a stock registration firm ($1,610,000) to cover the filing costs to register the newly issued PDC shares. The 79,800,000 SNI shares already held (35% of SNI) are fair-valued at the date of acquisition. These shares were on the books of PDC under the equity method at March 31, 2020 with a carrying value of $1,975,680,000.

SNI has two large projects under development, which are unrecorded on the books of SNI. PDC provisionally values these projects at $460,800,000 and $283,700,000 respectively for a total of $744,500,000. PDC hires an outside consulting firm to appraise these two projects but the consultant’s final report will not be available until November 5, 2020. When PDC receives the consultant’s report, it plans to revise the fair value amount if necessary.

Exhibit 1 below provides details about SNI’s net assets at acquisition date. Tax effects associated with the acquisition can be ignored.

Questions:

Prepare the journal entries recorded on the books of PDC to record the acquisition on April 1, 2020. These are the entries PDC reports in its books, NOT the consolidation entries. PDC will continue to use the equity method for internal purposes. These entries should also reflect the “correct” accounting for the existing 35% holding, the options issued to the CEO and the cash paid to both the CPA firm and stock registration firm.
Using the information provided (making any appropriate adjustments and ignoring tax effects) compute the amount of goodwill that is reported on the consolidated balance sheet for this acquisition at April 1, 2020. Show workings.
Prepare the consolidation entries [E] and [A], as defined in the text, required to prepare a consolidated balance sheet as at the date of acquisition, April 1, 2020. These are the entries to reflect the consolidated balance sheet immediately after the transaction is completed.
PDC receives the consultant’s report on November 2, 2020. The consultant’s fair value the two R&D projects as at April 1, 2020 at $482,700,00 and $305,000,000 respectively for a total of $787,700,000. How does this impact the amount of goodwill to be reported on the consolidated balance sheet at December 31, 2020?