Question Four: On December 31, Pacifica, Inc., acquired 100 percent of the voting stock of Seguros Company. Pacifica will maintain Seguros as a wholly owned subsidiary with its own legal and accounting identity. The consideration transferred to the owner of Seguros included 59,290 newly issued Pacifica common shares ($20 market value, $5 par value) and an agreement to pay an additional $130,000 cash if Seguros meets certain project completion goals by December 31 of the following year. Pacifica estimates a 50 percent probability that Seguros will be successful in meeting these goals and uses a 4 percent discount rate to represent the time value of money. Immediately prior to the acquisition, the following data for both firms were available: Revenues Expenses Net income Retained earnings, 1/1 Net income Dividends declared Pacifica $ (1,760,000) 1,232,000 (528,000) $ (1,019,000) (528,000) 185,000 Seguros Book Values Seguros Fair Values Retained earnings, (1,362,000 12/31 Cash $ 166,000 $ 149,000 S 149,000 Receivables and 348,000 223,000 204,200 inventory Property, plant, and 1,840,000 501,000 686,000 equipment Trademarks Total assets Liabilities Common stock Additional paid-in 391,000 S 2,745,000 $ S (508,000) S 167,000 211,600 1,040,000 (265,000) S (265,000) capital (400,000) (475,000) (200,000) (70,000) Retained earnings (1,362,000) (505,000 Total liabilities (2,745,000 (1,040,000 and equities and In addition, Pacifica assessed a research development project under way at Seguros to have a fair value of $140,000. Although not yet recorded on its books, Pacifica paid legal fees of $23,600 in connection with the acquisition and $9,400 in stock issue costs.