Question
Patterson Company acquired all of Shapiro, Inc.'s outstanding shares on December 31, 2021, for $495,000 by issuing $200,000 in long-term liabilities and paying $295,000 in
Patterson Company acquired all of Shapiro, Inc.'s outstanding shares on December 31, 2021, for $495,000 by issuing $200,000 in long-term liabilities and paying $295,000 in cash. Patterson also paid in cash, $45,000, for legal and accounting fees associated with the acquisition.
Several of Shapiros accounts have fair values that differ from book values. Shapiro has also internally developed assets that remain unrecorded on its books (i.e., book value equals zero, but the fair value is non-zero). Its remaining assets and liabilities have book values equal to their fair values. The assets and liabilities with fair value and book value differences are reported as follows:
Book Values | Fair Values | |
Computer Software | $20,000 | $70,000 |
Equipment | $40,000 | $30,000 |
Client Contracts | $ - | $100,000 |
In-Process research and development | $ - | $40,000 |
Notes Payable | $(60,000) | $ (65,000) |
On December 31, 2021, the pre-combination book values of both companies are as follows.
Patterson | Shapiro | |
Cash | $531,000 | $18,000 |
Receivables | $116,000 | $52,000 |
Inventory | $140,000 | $90,000 |
Computer Software | $210,000 | $20,000 |
Buildings (net) | $595,000 | $130,000 |
Equipment (net) | $308,000 | $40,000 |
Total assets | $1,900,000 | $350,000 |
Accounts Payable | $(88,000) | $(25,000) |
Notes Payable | $(510,000) | $(60,000) |
Common Stock | $(380,000) | $(100,000) |
Additional paid-in capital | $(170,000) | $(25,000) |
Retained Earnings | $(752,000) | $(140,000) |
Total Liabilities and Equities | $(1,900,000) | $(350,000) |
Note: Parentheses indicate a negative balance.
Assume that no dissolution takes place in connection with this combination. Patterson will operate Shapiro as a wholly-owned subsidiary with a separate legal and accounting identity. Both companies retain their separate legal identities. Prepare the journal entries to record the business combination in Pattersons books and consolidate the two companies as of the combination date.
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