M & M has agreed to acquire all of the net assets of Laffy on 12/31/x1. M & M will give Laffy Tffy 2,000,000 shares of M & M stock, and a 2002 Dae woo Leganza sedan with leather interior. Detail of the transactions is below.

M M Shares

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Par value per share 0.01

APIC per share 10

Trading price at 12/31/x1 0.1

Book value/ Fair value

Assets

Laffy Taffy PP&E 500,000/1,000,000

Laffy Taffy Cash 100,000/100,000

Laffy Taffy Inventory 500,000/1,000,000

Laffy Taffy Patents /200,000

Daewoo Leganza 7,000/7,000

What is goodwill ?

Assume that M & M is forming a subsidiary, named Laffy, Taffy is issuing 1,000,000 shares of common stock with $1 par value. In between 8/31/x1 and

12/31/x1, Laffy Taffy purchased the assets above and earned $100,000 in net income.

a) Record the transaction 8/31/x1 on the book of both Laffy Taffy and M& M that reflects the formation of the entity.

b) Recore all of the transactions between 8/31/x1 and 12/31/x1 for M & M to record its investment in Laffy Taffy under the equity method.

c) Below is the balance sheet of M &M at 8/31/x1.

a. Provide a balance sheet of M & M on 12/31/x1 with the investment of Laffy Taffy recorded under the equity method.

b. Provide the balance sheet of Laffy Taffy on 12/31/x1.

c. Provide a consolidated worksheet and journal entries to arrive at the consolidated balance sheet for M & M /Laffy on 12/31/x1.

M & M

$ in millions 12/31/x1

Assets

Cash 20

AR 40

Inventory 50

PP &E 100

Total assets 210

Liabilities

AP 10

Short-term debt 40

Accrued bonus 10

Long-term debt 70

Shareholder's equity

Retained earning 30

Common stock 1

APIC 49

Total liability and equity 210