Major Corporation Issues 1,000,000 Common Shares for All of the Outstanding

question 44

Essay

Major Corporation issues 1,000,000 common shares for all of the outstanding common shares of Minor Corporation on August 1, Year 1. The shares issued have a fair market value of $40.
In addition, the merger agreement provides that if the market price of Major's shares is below $60 two years from the date of the merger, Major will issue additional shares to the former shareholders of Minor Corporation in an amount that will compensate them for their loss of value.
Major predicts that there is a 25% probability that Major's shares will be trading at $59 per share and a 75% probability that they will be trading at greater than $60 per share two years from the date of the merger. Assume a discount rate of 7%.
Required:
Prepare the journal entry to record the issuance of the shares.

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Definitions:

Technological Change

The introduction of new technologies or the improvement of existing ones, which can significantly impact productivity, efficiency, and value creation in various sectors.

Minimum Efficient Scale

The smallest level of production at which long-term average total costs are minimized, allowing a firm to compete effectively in the market.

Parity Ratio

The ratio of the price received by farmers from the sale of an agricultural commodity to the prices of other goods paid by them; usually expressed as a percentage; used as a rationale for price supports.

Price Supports

Government interventions in the market to maintain the price of a commodity at a certain level.