Constructing the Consolidated Balance Sheet at Acquisition
Easton Company acquires 100 percent of the outstanding voting shares of Harris Company. To obtain these shares, Easton pays $420,000 in cash and issues 5,000 of its $10 par value common stock. On this date, Easton’s stock has a fair value of $72 per share, and Harris’s book value of stockho lders' equity is $560,000. Easton is willing to pay $780,000 for a company with a book value for equity of $560,000 because it believes that (1) Harris's buildings are undervalued by $80,000, and (2) Harris has an unrecorded patent that Easton values at $60,000. Easton considers the remaining balance sheet items to be fairly valued (no book-to-market difference). The remaining $80, 000 of the purchase price is ascribed to corporate synergies and other general unidentifiable intangible assets (goodwill). The balance sheets at the acquisition date follow:
a. Show the breakdown of the investment into the book value acquired, the excess of fair value over book value, and the portion of the investment representing goodwi ll.
b. Prepare the consolidating adjustments and the consolidated balance sheet on the date of acquisition.
c. How will the excess of the purchase price over book value acquired be treated in years subsequent to the acquisition?
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