Acquisition Problem

Below is a scenario for "Company P" acquiring "Company S". In this scenario, "Company P" can structure the transaction as either a direct purchase of the net assets of "Company S", or they may purchase 100% of the outstanding stock of "Company S". Under both scenarios, "Company P" will be paying $500,000
and will incur indirection acquisition costs of $10,000.

Following is the balance sheet and fair market values for Company S" on the date of acquisition:

Balance Sheet as of 6/30/13

Assets Liabilities & Owners' Equity
Book Value Fair Market Value Book Value Fair Market Value
Cash $0 $0 A/P $50,000 $50,000
A/R 50,000 40,000 Notes Payable75,000 75,000
Inventory 100,000 80,000 Bonds Payable 25,000 25,000
Net Machin & Equip100,000 150,000 Total Liabilities:$150,000
Net Buildings 50,000 100,000
Land 100,000 150,000 Common Stock 100,000
Patent 0 30,000 Retained Earnings150,000
Total Equity:$250,000

Total Assets: $400,000 Total Liabilities & O.E.: $400,000


A) Prepare the journal entry that would be made on the books of " on the date of acquisition:

Balance Sheet as of 6/30/13

Assets Liabilities & Owners' Equity
Book Value Fair Market Value Book Value Fair Market Value
Cash $0 $0 A/P $50,000 $50,000
A/R 50,000 40,000 Notes Payable75,000 75,000
Inventory 100,000 80,000 Bonds Payable 25,000 25,000
Net Machin & Equip100,000 150,000 Total Liabilities:$150,000
Net Buildings 50,000 100,000
Land 100,000 150,000 Common Stock 100,000
Patent 0 30,000 Retained Earnings150,000
Total Equity:$250,000

Total Assets: $400,000 Total Liabilities & O.E.: $400,000


A) Prepare the journal entry that would be made on the books of " under an asset acquisition scenario:

B) Prepare the journal entry that would be made on the books of " under an asset acquisition scenario:

B) Prepare the journal entry that would be made on the books of " under an asset acquisition scenario:

C) Prepare the journal entry that would be made on the books of " under an asset acquisition scenario:

C) Prepare the journal entry that would be made on the books of " under a stock purchase scenario: