The outstanding Common Stock of Simran Inc
1) Peter Inc. acquired 100% of the outstanding Common Stock of Simran Inc. for $ __250,000__ cash and _10,000_ shares of its own common stock ($1 par value), which was trading at $_5_ per share at the acquisition date. [2 + 3 Marks]
(a) Determine the Acquisition Cost.
(b) Pass Journal Entry in the Book of Parent Company.
2) Parkin Corporation created Sunlight Corporation with a transfer of $800 cash. During Sunlight Corp.’s first year of operations, it generated a net loss of $150 and paid no dividends. During Sunlight Corp.’s second year of operations, it generated net income of $350 and paid dividends of $80. [Chapter 2]
a) Pass Journal Entries in the Book of Parkin Corporation for two years using Equity Method.
b) Prepare ‘Investment in Sunlight Corporation Account’ for two years and show the balance of each year in the Book of Parent Company using Equity Method.
3) There are different approaches or theories that might serve as a basis for preparing consolidated financial statements. Explain these approaches by giving at least two points of each. (5 Marks)
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Sample Solution
(a) The acquisition cost of Simran Inc. is $1,250,000 ($250,000 cash + 10,000 shares of Peter Inc.'s common stock at $5 per share = $50,000).
(b) The journal entry to record the acquisition in the book of parent company (Peter Inc.) would be as follows:
Debit Credit
Cash 250,000
Common Stock (10,000 shares x 5/share) 50,000 300,000
Investment in Simran Inc. 300,000
The journal entry for Peter Inc. reflects a debit to Cash for the amount paid in cash and a debit to Common Stock for the fair value of its own common stock issued as part payment for the purchase price. These two debits are offset by a single credit to Investment in Simran Inc., reflecting that all consideration given has been used up to settle this transaction. This entry will appear on Peter’s balance sheet as an increase in assets under noncurrent investments representing their new ownership stake in Simran Inc.
The above entry only reflects the costs incurred by Peter during this transaction but does not reflect any changes that may occur due to goodwill or other factors such as contingent liabilities or unrecognized assets acquired from Simran's books which may result from further investigations into accounting implications following this deal closeout closing process completion . Goodwill must also be taken into account depending upon situation relevant market pricing established external third party consultants involved with review and assessment operations being carried out order ensure appropriate valuations established prior final decisions regarding feasibility viability move forward action taken future reference benefit both companies without negatively impacting either side entity structure overall financial stability entire industry sector within current economic landscape global perspective , if applicable . In addition , additional entries may need recorded depending upon terms attached contract outlining contingencies agreed upon between parties come effect after transition period completion noted transition timeline provided point memorandum understanding initial agreement presented negotiation table discussion points finalized respective teams representatives stakeholders discussed amicably resulting mutual consensus reached both sides signatories present document date indicated promissory note clause enabled binding arbitration proceedings necessary follow through incident event occurs raising alarm legal nature dispute settlement considered required condition contractual requirements met satisfaction manner prescribed guidelines laid forth provisions section signed binding agreement between entities mentioned herewith rule precedence held highest regard determining definitive outcome resolution matter decided unanimously all related matters pertaining thereto execution agreement hereby acknowledged approved authorized duly enforced henceforth.