Exercise 2 (LO 3) Asset compared to stock purchase. Glass Company is thinking about acquiring Plastic Company. Glass Company is considering two methods of accomplishing control and is wondering how the accounting treatment will differ under each method. Glass Company has estimated that the fair values of Plastics net assets are equal to their book values, except for the equipment, which is understated by $20,000.

The following balance sheets have been prepared on the date of acquisition:

Assets Glass Plastic

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $540,000 $ 20,000

Accounts receivable . . . . . . . . . . . . . . . 50,000 70,000

Inventory . . . . . . . . . . . . . . . . . . . . . . . . 50,000 100,000

Property, plant, and equipment (net) . . . 230,000 270,000

Total assets. . . . . . . . . . . . . . . . . . . . . $870,000 $460,000

Liabilities and Equity

Current liabilities . . . . . . . . . . . . . . . . . . $140,000 $ 80,000

Bonds payable . . . . . . . . . . . . . . . . . . . 250,000 100,000

Stockholders equity:

Common stock ($100 par). . . . . . .200,000 150,000

Retained earnings . . . . . . . . . . . . . 280,000 130,000

Total liabilities and equity . . . . . . . . . $870,000 $460,000

1. Assume Glass Company purchased the net assets directly from Plastic Company for $530,000.

a. Prepare the entry that Glass Company would make to record the purchase.

b. Prepare the balance sheet for Glass Company immediately following the purchase.

2. Assume that 100% of the outstanding stock of Plastic Company is purchased from the former stockholders for a total of $530,000.

a. Prepare the entry that Glass Company would make to record the purchase.

b. State how the investment would appear on Glasss unconsolidated balance sheet prepared immediately after the purchase.

c. Indicate how the consolidated balance sheet would appear.