On December 31, Year 1, Arrington, Inc.,(AI) acquired 100 percent of the voting stock of Reagan Corporation (RC). RC although a wholly owned subsidiary, will continue to operate with its own legal and accounting identity. AI issued 50,000 shares of its $2 par common stock (market value $70) to Eliza Gardner the owner of RC in payment for the company. Also AI agreed to pay Gardner an additional $350,000 if certain earnings targets for RC are met in Year 2. AI estimates that Gardner has a 54 percent probability of meeting the earnings goals and uses a 8 percent discount rate to represent the time value of money.

Financial Statement information for both firms immediately after the acquisition is shown below and on the following page. Arrington also paid $30,000 in stock issue costs and $45,000 in accounting and legal fees.

Gardner Corp

Book Value Fair Value

Cash $ 200,000 $ 200,000

Accounts Receivable 540,000 540,000

Inventory 300,000 360,000

PPE 1,500,000 1,900,000

In Process R&D 0 400,000

Total Assets $2,540,000 $ 3,400,000

Accounts payable (140,000) (140,000)

Bonds Payable (250,000) (250,000)

Common stock (150,000)

Additional paid-in capital (1,300,000)

Retained earnings (700,000)

Total liabilities and equities $2,540,000

Prepare the journal entries for AI to account for the consideration transferred Gardner the former owners (RC), the direct combination costs, and the stock issue and registration costs on December 31, Year 1.