Situation On January 1, 2018, Northridge Corporation acquired Reseda Corporation

ID: 2510900 • Letter: S

Question

Situation On January 1, 2018, Northridge Corporation acquired Reseda Corporation by purchasing 100% of the stock of Reseda in exchange for 40,000 shares of Northridge stock. On the date of acquisition Northridge stock traded for $18 per share on the stock exchange. The book values of each company on January 1, 2018, are shown belovw. Northridse CorReseda Corp Current assets Noncurrent assets Current liabilities Noncurrent liabilities Owners' equity $640,000 1,280,000 420,000 140,000 760,000 100,000 180,000 620,000 300,000 1,200,000 Additional information The fair market value of Reseda's inventory is $20,000 higher than the book value. During 2018, the following transactions occurred: 1. Northridge sold inventory to Reseda for $100,000 on account. The normal profit on sales for Northridge is 40%. At December 31, 2018, Reseda had 20% of the goods remaining in ending inventory. At December 31, 2018, Reseda had not paid Northridge for $16,000 of the inventory 2. On October 1, 2018, Reseda Corp., sold equipment to Northridge for $48,000. The equipment was purchased by Reseda on 1/1/15 for $120,000 and was depreciated straight-line over five years with no salvage value. Northridge depreciated the new equipment over three years with no salvage value. At December 31, 2018, totals from the preclosing trial balances of both firms are as follows Northridge Corporation & Subsidiaries UNADJUSTED TRIAL BALANCE December 31, 2018 Northridge Corp Reseda Corp. Revenues Expenses Current assets Noncurrent assets Current liabilities Noncurrent liabilities Owners' equity 2,000,000 1,560,000 800,000 2,520,000 600,000 360,000 1,920,000 800,000 670,000 220,000 840,000 140,000 170,000 620,000

Explanation / Answer

Elimination entries

Northridge Corp

Reseda

Corp

Debit

Credit

End Balance

Revenues

2,000,000

800,000

40000+18000=56000

1000000-58000=942000

Expenses

1,560,000

670,000

2,230,000

Current Assets

800,0000

220,000

100000

920,000

Non Current Assets

2,520,000

840,000

30000

3,330,000

Current Liabilities

600,0000

140,000

16000

724000

Non Current Liabilities

360,000

170,000

530000

Owners equity

1,920,000

620,000

2540000

Working part:

1) Calculation of Depreciation:

Reseda:

Purchased equipment on 1/1/15 for $120,000

Residual value – Nil, Expected life of equipment – 5years

Depreciation per year = (cost- salvage value)/Expected life of asset

=(120,000-0)/5

= $24000

Therefore, cost of equipment for Reseda on October 2018= 120,000- {(24000*3) +24000*9/12}

= $30000

Sale price= $48000

Profit of Reseda =Sale price – Cost

= 48000-30000

= $18000

Northridge depreciation = (cost- salvage value)/Expected life of asset

= (48000-0)/3

= $16000

Normal profir of Northridge = 100000*40=40000

Revenues are to be added which should not be as both the company are going to be merged therefore to eliminate the effect both the revenue are to be debited

2) Current asset of Reseda was of 100000 taken from Northeidge to be eliminated.

3) Non-Current asset of Northridge cost to 30000 as calculated above is to be eliminated.

4) Liability of 16000 not paid by Reseda should be deducted from current liability