Lexington Corporation acquired all of the outstanding common stock of Chalfont, Inc., on January 1, 2013. Lexington gave shares of its no par common stock with a market value of $504 million in exchange for the Chalfont common stock. Chalfont will remain a legally separate entity after the exchange, but Lexington will prepare consolidated financial statements with Chalfont each period. Exhibit 8.25 presents the balance sheets of Lexington and Chalfont on January 1, 2013, just prior to the acquisition. The market value of Chalfont's fixed assets exceeds their book value by $80 million. Chalfont owns a copyright with a market value of $50 million.

Chalfont is a defendant in a lawsuit that it expects to settle during 2013 at a cost of $30 million. The firm carries no insurance against such lawsuits. Lexington plans to establish an acquisition reserve for this lawsuit.

REQUIRED

a. Prepare a schedule that shows the allocation of the consideration given to individual assets and liabilities under the acquisition method. Ignore deferred tax effects.

b. Prepare a consolidated balance sheet for Lexington and Chalfont on January 1, 2013. Show your supporting calculations for any amount that is not simply the sum of the amounts for Lexington and Chalfont from their separate financial records.

Transcribed Image Text:

Exhibit 8.25 Lexington Corporation and Chalfont, Inc. Balance Sheets January 1,2013 amounts in millions) Problem 8.19) Lexington Corporation Chalfont, Inc. $ 30 90 360 Cash Accounts receivable Fixed assets (net) Copyright Deferred tax asset Goodwill $ 100 240 1,000 40 Total Assets $1,380 $480 Accounts payable and accruals Long-term debt Deferred tax liability Other noncurrent liabilities Common stock Retained earnings 240 480 160 120 320 60 $1,380 80 100 100 200 $480 Total Liabilities and Shareholders' Equity