The July 31, Year 3, balance sheets of two companies that are parties to a business combination are as follows:

	Red Corp.				Sax Inc.
	Carrying Amount				Carrying Amount				Fair Value
Current assets	$	1,740,000			$	434,000		$	482,000
Property, plant, and equipment (net)		1,248,000				854,000			986,000
Patents		-				-			86,000
	$	2,988,000			$	1,288,000
Current liabilities	$	1,500,000			$	266,000			266,000
Long-term debt		494,000				374,000			398,000
Common shares		860,000				182,000
Retained earnings		134,000				466,000
	$	2,988,000			$	1,288,000

In addition to the property, plant, and equipment identified above, Red Corp. attributed a value of $114,000 to Saxs assembled workforce. They have the knowledge and skill to operate Saxs manufacturing facility and are essential to the success of the operation. Although the eight manufacturing employees are not under any employment contracts, management of Red was willing to pay $114,000 as part of the purchase price on the belief that most or all of these employees would continue to work for the company.

Effective on August 1, Year 3, the shareholders of Sax accepted an offer from Red Corporation to purchase all of their common shares. Reds costs for investigating and drawing up the share purchase agreement amounted to $16,000.

(b) Assume that Red issued 120,000 common shares, with market value of $8 per share to the shareholders of Sax for 100% of their shares. Legal fees associated with issuing these shares amounted to $4,000 and were paid in cash. Red is identified as the acquirer.

(i) Prepare the journal entries in the records of Red to record the share acquisition and related fees. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Record the acquisition of shares from Sax for $960,000. Transaction 1

record the 16,000 cash paid for proessional fees expense and 4000 paid for legal fees for issue of shares Transaction 2

Red Corp.
Consolidated Balance Sheet
August 1, Year 3
Assets
	$0
Liabilities and Equity
	$0

Q2. Answers for part A and B given part C required

a) Assume that Davis made a $1,040,000 cash payment to Bagley for its net assets. Prepare the journal entries in the accounting records of Davis to record the business combination. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

No	Transaction	General Journal	Debit	Credit
A	1	Plant and equipment	1,053,000
		Patents	78,000
		Current assets	507,000
		Goodwill	91,000
		Long-term debt		416,000
		Current liabilities		273,000
		Cash		1,040,000
B	2	Professional fees expense	19,500
		Cash		19,500

(b) Assume that Davis issued 130,000 ordinary shares, with a market value of $8.00 per share, to Bagley for its net assets. Legal fees associated with issuing these shares amounted to $6,500 and were paid in cash. Davis had 150,000 shares outstanding prior to the takeover.

(i) Prepare the journal entries in the records of Davis to record the business combination. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

No	Transaction	General Journal	Debit	Credit
A	1	Plant and equipment	1,053,000
		Patents	78,000
		Current assets	507,000
		Goodwill	91,000
		Long-term debt		416,000
		Current assets		273,000
		Ordinary shares		1,040,000
B	2	Ordinary shares	6,500
		Cash		6,500

(ii) Prepare the statement of financial position of Bagley immediately after the sale.

Bagley Incorporated
Statement of Financial Position
August 1, Year 4
Assets
	$0
Liabilities and Equity
	$0