Identifiable Intangibles and Goodwill

Prince Corporation, a wholesale vehicle distributor, acquires all of the stock of Squire Service Corporation for one million shares of Prince stock, valued at $35 per share. Squire becomes a subsidiary of Prince. Professional fees connected with the acquisition are $1,200,000 and costs of registering and issuing the new shares are $600,000, both paid in cash.

Squire performs vehicle maintenance services for owners of auto, truck and bus fleets. The balance sheets of Prince and Squire immediately prior to the acquisition are shown next.

Balance Sheets	Prince	Squire
Cash	$2,800,000	$300,000
Accounts receivable	6,000,000	2,700,000
Parts inventory	--	5,200,000
Vehicle inventory	15,000,000	--
Equipment, net	40,000,000	17,600,000
Total assets	$63,800,000	$25,800,000
Current liabilities	$5,000,000	$3,100,000
Long-term liabilities	25,000,000	8,600,000
Shareholders' equity	33,800,000	14,100,000
Total liabilities and equity	$63,800,000	$25,800,000

In reviewing Squire's assets and liabilities, you determine the following:

1. On a discounted present value basis, the accounts receivable have a fair value of $2,600,000, and the long-term liabilities have a fair value of $8,000,000.

2. The current replacement cost of the parts inventory is $6,000,000.

3. The current replacement cost of the equipment is $19,500,000.

4. Squire occupies its service facilities under an operating lease with ten years remaining. The rent is below current market levels, giving the lease an estimated fair value of $1,250,000.

5. Squire has long-term service contracts with several large fleet owners. These contracts have been profitable; the present value of expected profits over the remaining term of the contracts is estimated at $2,000,000.

6. Squire has a skilled and experienced workforce. You estimate that the cost to hire and train replacements would be $750,000.

7. Squires trade name is well-known among fleet owners and is estimated to have a fair value of $200,000.

Required

(a) Prepare the acquisition entry and a working paper to consolidate the balance sheets of Prince and Squire as of the date of acquisition.

Enter your answers in thousands. For example, $1,200,000 is $1,200 in thousands.

General Journal
Description	Debit	Credit
Answer	Answer	Answer
Merger expenses	Answer	Answer
Answer	Answer	Answer
Cash	Answer	Answer

The account balances for Prince, shown in the working paper below, reflect the above entry. Merger expenses reduce retained earnings, a component of stockholders' equity.

• Use negative signs with your credit balance answers in the Dr (Cr) columns.
• Enter your answers in thousands. For example, $6,000,000 is $6,000 in thousands.

Consolidation Working Paper
	Accounts Taken From Books		Eliminations
(in thousands)	Prince Dr (Cr)	Squire Dr (Cr)		Debit	Credit		Consolidated Balances Dr (Cr)
Cash	$Answer	$Answer					$Answer
Accounts receivable	Answer	Answer			Answer	(R)	Answer
Parts inventory		Answer	(R)	Answer			Answer
Vehicle inventory	Answer						Answer
Equipment, net	Answer	Answer	(R)	Answer			Answer
Investment in Squire	Answer				Answer	(E)	Answer
					Answer	(R)
Intangible: Lease			(R)	Answer			Answer
Intangible: Service contracts			(R)	Answer			Answer
Intangible: Trade name			(R)	Answer			Answer
Goodwill			(R)	Answer			Answer
Current liabilities	Answer	Answer					Answer
Long-term liabilities	Answer	Answer	(R)	Answer			Answer
Shareholders' equity	Answer	Answer	(E)	Answer			Answer
Total	$Answer	$Answer		$Answer	$Answer		$Answer

(b) If the acquisition was a merger, Prince records Squires assets and liabilities directly on its own books. Present Princes entry to record the merger, and compare Princes balance sheet immediately after the entry is booked with the consolidated balance sheet prepared in part a.Use negative signs with your credit balance answers in the Dr (Cr) columns.

Enter your answers in thousands. For example, $6,000,000 is $6,000 in thousands.

General Journal
Description	Debit	Credit
Cash	Answer	Answer
Accounts receivable	Answer	Answer
Parts inventory	Answer	Answer
Equipment, net	Answer	Answer
Intangible: Lease	Answer	Answer
Intangible: Service Contracts	Answer	Answer
Intangible: Trade Name	Answer	Answer
Goodwill	Answer	Answer
Answer	Answer	Answer
Answer	Answer	Answer
Current liabilities	Answer	Answer
Long-term liabilities	Answer	Answer
Capital Stock	Answer	Answer