Pulman Company Acquired 90% of the Stock of Spectrum Company

question 22

Essay

Pulman Company acquired 90% of the stock of Spectrum Company for $6,300,000 on January 1, 2013.On this date, the fair value of the assets and liabilities of Spectrum Company was equal to their book value except for the inventory and equipment accounts.The inventory had a fair value of $2,300,000 and a book value of $1,900,000.The equipment had a fair value of $3,300,000 and a book value of $2,800,000.
The balances in Spectrum Company's capital stock and retained earnings accounts on the date of acquisition were $3,700,000 and $1,900,000, respectively.
Required:
In general journal form, prepare the entries on Spectrum Company's books to record the effect of the pushed down values implied by the acquisition of its stock by Pulman Company assuming that:
A values are allocated on the basis of the fair value of Spectrum Company as a whole imputed from the transaction.
B values are allocated on the basis of the proportional interest acquired by Pulman Company.

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Definitions:

Risk Adjusted

Adjusting returns or valuations to take into account the level of risk involved, ensuring that comparisons account for different risk levels.

Consolidation

The process of combining multiple entities, assets, or financial statements into a single entity or financial statement.

Acquisition

The process of purchasing another company to gain control, typically through a buyout or merger.

Merger

The combination of two or more businesses under one ownership in which all but one legal entity ceases to exist, and the combined organization continues under the name of the surviving firm. When the surviving firm acquires the stock of the others, the transaction can be called an acquisition. A merger is friendly if it has the approval and support of the acquired (target) firm’s management. It is unfriendly if the target’s management resists. The term merger tends to be used loosely to refer to any business combination.