On February 15, 2005, officers of Sun Corporation agreed with George Merlo, sole stockholder of Merlo Company and Merlo Industries, Inc., to acquire all his common stock ownership in the two companies as follows:

 

1. 10,000 shares of Shane's $1 par common stock (current fair value $30 a share) would be issued to George Merlo on February 28, 2005, for his 1,000 shares of $10 par common stock of Merlo Company. In addition, 20,000 shares of Sun common stock would be issued to George Merlo on February 28, 2010, if aggregate net income of Merlo Company for the five-year period then ended exceeded $300,000.

 

1. $250,000 cash would be paid to George Merlo on February 28, 2005, for his 10,000 shares of $1 par common stock of Merlo Industries, Inc. In addition $250,000 in cash would be paid to George Merlo on February 28, 2010, if aggregate net income of Merlo Industries, Inc., for the five-year period then ended exceeded $300,000.

 

Both Merlo Company and Merlo Industries, Inc., were to be merged into Sun on February 28, 2005, and were to continue operations after that date as divisions of Sun. George Merlo also agreed not to compete with Sun for the period March 1, 2005, through February 28, 2010. Because the merger was negotiated privately and George Merlo signed a "letter agreement" not to dispose of the Sun common stock he received, the business combination was not subject to the jurisdiction of the SEC. Out-of-pocket costs of the business combination may be disregarded.

Selected financial statement data of the three constituent companies as of February 28,

2005 (prior to the merger), were as follows:

 

Sun    Corporation

Merlo Company

Merlo Industries, Inc.

Total assets

$25,000,000

$ 500,000

$ 600,000

Stockholders' equity

10,000,000

200,000

300,000

Net sales

50,000,000

1,500,000

2,500,000

Basic earnings per share

5

30

3

 

The controller of Sun prepared the following condensed journal entries to record the merger on February 28, 2005:

 

Assets other than goodwill   600,000

Goodwill                               10,000

Liabilities                                           300,000

Common Stock                                  10,000

Common Stock to Be Issued               20,000

Paid-in Capital in Excess of Par         280,000

 

To record merger with Merlo Company, with identifiable assets and liabilities recorded at current fair values and goodwill recognized.

 

Assets                         650,000

Goodwill                   150,000

Liabilities                              300,000

Payable to George Merlo      250,000

Cash                                      250,000

To record merger with Merlo Industries, Inc., with assets and liabilities of Merlo Industries, Inc., recorded at current fair values and goodwill recognized.

 

Instructions

·        Do you concur with the controller's journal entries? Explain.