The July 31, Year 3, balance sheets of two companies that are parties to a business combination are as follows: Red Corp. Carrying Amount $1,720,000 1,224,000 Sax Inc. Carrying Amount $ 432,000 852,000 Current assets Property, plant and equipment (net) Patents. Current liabilities Long-term debt Common shares Retained earnings $2,944,000 $1,480,000 492,000 840,000 132,000 $2,944,000 $1,284,000 $ 264,000 372,000 180,000 468,000 $1,284,000 Fair Value $480,000 984,000 84,000 264,000 396,000 In addition to the property, plant and equipment identified above, Red Corp. attributed a value of $112,000 to Sax's assembled workforce. They have the knowledge and skill to operate Sax's 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 $112,000 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. Red's costs for investigating and drawing up the share purchase agreement amounted to $20,000. Required: (a) Assume that Red made a $944,000 cash payment to the shareholders of Sax for 100% of their shares. (1) Prepare the journal entry in the records of Red to record the share acquisition. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) (ii) Prepare the consolidated balance sheet of Red Corp. as at August 1, Year 3. Red Corp. Consolidated Balance Sheet August 1, Year 3 (b) Assume that Red issued 118,000 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 $7,000 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.) View transaction list View jour entry worksheet (ii) Prepare the consolidated balance sheet of Red as at August 1, Year 3. Red Corp. Consolidated Balance Sheet August 1, Year 3 (c) Assume the same facts as part (b) except that Red is a private company, uses ASPE, and chooses to use the cost method to account for its investment in Sax. (1) 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.) View transaction list View journal entry worksheet No Transaction General Journal Debit Credit (ii) Prepare the balance sheet of Red as at August 1, Year 3. Red Corp. Balance Sheet August 1, Year 3
