FA4 Spring

Assignment 1

Question 1:
a) The professional fees would be expenses in the period they were incurred, as they do not increase the fair value of the business being acquired.
b) The share issuance cost could be accounted for by either; the offset method, where the issuance costs are deducted from the amount received in the sale of the shares; or by the retained earnings method, where the issuance cost are charged directly to retained earnings.
c) $91,000 of goodwill was included in the acquisition costs.
Acquisition Cost
Fair Value of Bagley’s Net Assets (1,638,000 – 689,000)
Goodwill
d) Journal entry for Davis Inc. (cash):
Current assets
Property, plant & equipment
Patents
Goodwill
Current liabilities
Long-term debt
Cash

$1,040,000
949,000
91,000

507,000
1,053,000
78,000
91,000
273,000
416,000
1,040,000

Professional fees expense
Cash

19,500
19,500

e) Davis Inc. is the acquirer because even with the additional 130,000 shares issued, they still hold over
50% of the total outstanding shares and thus maintain control over strategic, investment, financial and operating activities.
f)

Journal entry for Davis Inc. (shares):
Current assets
Property, plant & equipment
Patents
Goodwill
Current liabilities
Long-term debt
Common shares (130,000 x $8)

507,000
1,053,000
78,000
91,000
273,000
416,000
1,040,000

Professional fees expense
Cash

19,500
19,500

Common shares
Cash

6,500
6,500

g)
Bagley Corporation

Statement of Financial Position
August 1, Year 4
Common shares in Davis Inc.

$1,040,000

Common shares
Retained earnings (520,000 + 338,000)

$182,000
858,000
$1,040,000

Gain on sale: 1,040,000 – (1,365,000 - 390,000 - 273,000) = 338,000

Question 2:
a) Cost of 90% share in Donna Corp.
Implied 100% value of Donna Corp. ($351,000/0.90)
Carrying value of Donna Corp net assets:
Assets
$281,600
Liabilities
96,000
Acquisition differential
Fair Value excess