Pam Corporation Issues 50,000 Shares Of Its Own $10 Par Comm ✓ Solved
1. If the business combination is treated as a purchase, show the journal entries for this acquisition. Show all your calculations.
2. Prepare balance sheet for Pam Corporation right after the acquisition.
Paper For Above Instructions
The acquisition of Sam Corporation by Pam Corporation presents an opportunity to explore the accounting implications of this transaction. In the context of this acquisition, Pam Corporation retains the legal title to its assets while simultaneously recognizing the assets and liabilities of Sam Corporation on its balance sheet. The consolidation process involves several accounting principles, primarily Purchase Accounting, which requires that the acquiring company recognize the fair value of the acquired identifiable assets and liabilities.
Journal Entries for the Acquisition
To record the business combination as a purchase, the following journal entries will be made:
1. Record the legal fees and printing costs incurred:
Legal Fees: $10,000
Printing Costs: $5,000
Journal Entry:
Debit: Legal Expense $10,000
Debit: Printing Expense $5,000
Credit: Cash (or Accounts Payable) $15,000
2. Record the acquisition of Sam Corporation:
To calculate the stock issuance value and the additional paid-in capital:
Shares Issued: 50,000 shares
Par Value per Share: $10
Market Value per Share on Acquisition Date: $23
Total Paid for Sam Corporation: 50,000 shares x $23 = $1,150,000
Book Value of Sam Corporation's Net Assets:
Accounts Receivable: $230,000
Plant Assets: $0 (since only liabilities are valued)
Accounts Payable: ($200,000)
Total Net Assets: $30,000
Total Fair Value of Assets Acquired: $1,150,000
Since the book value of assets identified does not equal the purchase price, any excess is recognized as goodwill:
Goodwill Calculation:
Total Acquisition Cost: $1,150,000
Less: Fair Value of Net Assets: ($30,000)
Goodwill: $1,120,000
Final Journal Entry:
Debit: Common Stock (50,000 shares x $10 par) $500,000
Debit: Additional Paid-in Capital ($1,150,000 - $500,000) $650,000
Debit: Goodwill $1,120,000
Credit: Accounts Payable (liabilities assumed) $200,000
Credit: Cash (total direct costs incurred) $15,000
Balance Sheet of Pam Corporation after Acquisition
Below is the balance sheet of Pam Corporation right after the acquisition of Sam Corporation:
Pam Corporation
Consolidated Balance Sheet
As of July 1, 19X7
Assets
Accounts Receivable $2,800,000
Plant Assets $2,200,000
Goodwill $1,120,000
Cash and Cash Equivalents (after expenses) $XX (Assuming initial cash balance)
Total Assets $6,120,000 + cash balance
Liabilities and Equity
Accounts Payable $1,200,000 + $200,000
Total Liabilities $1,400,000
Common Stock $500,000
Additional Paid-in Capital $650,000
Retained Earnings $500,000 + net income impacts post-acquisition
Total Equity $XX (compute from retained earnings post-transaction)
Total Liabilities and Equity = Total Assets
Further Considerations
Upon examining the methods of consolidation, it is essential to ensure compliance with accounting standards such as ASC 805, which governs business combinations. The analysis of goodwill and subsequent evaluations of fair value against book value for goodwill impairment is critical for accurate financial reporting.
Conclusion
This acquisition analysis reflects not only the straightforward entries required but also the broader implications of how such mergers influence corporate accounting valuations. The above entries should be reviewed and validated against contemporary accounting rules and financial standards to ensure compliance.
References
- Financial Accounting Standards Board. (2017). Accounting Standards Codification 805: Business Combinations.
- Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Accounting Principles (13th ed.). Wiley.
- McKinsey & Company. (2020). Merger Integration: Lessons from the Field.
- Investopedia. (2021). Goodwill in Accounting - Definition, Accounting and Valuation.
- Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis: Text and Cases. Wiley.
- Palepu, K. G., Healy, P. M., & Bernard, V. L. (2016). Business Analysis and Valuation: Using Financial Statements. Cengage Learning.
- Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory and Practice. Cengage Learning.
- DePamphilis, D. M. (2019). Mergers, Acquisitions, and Other Restructuring Activities. Academic Press.
- Damodaran, A. (2015). Valuation: Measuring and Managing the Value of Companies. Wiley Finance.
- Horngren, C. T., Harrison, W. T., & Oliver, S. M. (2017). Financial Accounting (11th ed.). Pearson.