Question

On January 1, 2021, Casey Corporation exchanged $3,194,000 cash for 100 percent of the outstanding voting stock of Kennedy Corporation. Casey plans to maintain Kennedy as a wholly owned subsidiary with separate legal status and accounting information systems. At the acquisition date, Casey prepared the following fair-value allocation schedule:

Fair value of Kennedy (consideration transferred) $3,194,000
Carrying amount acquired 2,600,000
Excess fair value $650,000
to buildings (undervalued) $342,000
to licensing agreements (overvalued) (160,000) 182,000
to goodwill (indefinite life) $468,000

Immediately after closing the transaction, Casey and Kennedy prepared the following postacquisition balance sheets from their separate financial records (credit balances in parentheses).

Accounts Casey Kennedy
Cash $500,000 $176,250
Accounts receivable 1,410,000 345,000
Inventory 1,585,000 375,750
Investment in Kennedy 3,250,000 0
Buildings (net) 5,722,500 1,990,000
Licensing agreements 0 3,070,000
Goodwill 693,500 0
Total assets $13,161,000 $5,957,000
Accounts payable $(391,000) $(377,000)
Long-term debt (3,770,000) (2,980,000)
Common stock (3,000,000) (1,000,000)
Additional paid-in capital 0 (500,000)
Retained earnings (6,000,000) (1,100,000)
Total liabilities and equities $(13,161,000) $(5,957,000)

Required:
Prepare an acquisition-date consolidated balance sheet for Casey Corporation and its subsidiary Kennedy Corporation.

Answer 1

Question Completion Basis:

On January 1, 2021, Casey Corporation exchanged $3,250,000 cash for 100 percent of the outstanding... "and not $3,194,000".

Answer:

Cassey Corporation

Post Acquisition Balance Sheets

(credit balances in parentheses)

Accounts                                       Casey              Kennedy     Consolidated

Cash                                           $500,000          $176,250            $676,250

Accounts receivable                   1,410,000           345,000            1,755,000

Inventory                                    1,585,000           375,750             1,960,750

Investment in Kennedy            3,250,000                       0                           0

Buildings (net)                           5,722,500       2,332,000            8,054,500

Licensing agreements                             0       2,888,000            2,888,000

Goodwill                                        693,500                     0              1,183,500

Total assets                             $13,161,000      $6,117,000         $16,518,000

Accounts payable                     $(391,000)      $(377,000)             (768,000)

Long-term debt                        (3,770,000)     (2,980,000)        (6,750,000)

Common stock                        (3,000,000)      (1,000,000)        (3,000,000)

Additional paid-in capital                        0          (500,000)

Retained earnings                  (6,000,000)       (1,100,000)        (6,000,000)

Total liabilities and equities $(13,161,000)   $(5,957,000)       $16,518,000

Explanation:

a) Data and Calculations:

Fair-value allocation schedule:

Fair value of Kennedy (consideration transferred) $3,250,000

Carrying amount acquired                                         2,600,000

Excess fair value                                                            650,000

to buildings (undervalued)                                          $342,000

to licensing agreements (overvalued) (160,000)         160,000

to goodwill (indefinite life)                                          $468,000

Post Acquisition Balance Sheets

(credit balances in parentheses)

Accounts                                       Casey                Kennedy

Cash                                           $500,000            $176,250

Accounts receivable                   1,410,000             345,000

Inventory                                    1,585,000             375,750

Investment in Kennedy            3,250,000                         0

Buildings (net)                           5,722,500          1,990,000

Licensing agreements                             0         3,070,000

Goodwill                                        693,500                       0

Total assets                             $13,161,000      $5,957,000

Accounts payable                     $(391,000)        $(377,000)

Long-term debt                       (3,770,000)       (2,980,000)

Common stock                       (3,000,000)       (1,000,000)

Additional paid-in capital                        0          (500,000)

Retained earnings                 (6,000,000)        (1,100,000)

Total liabilities and equities $(13,161,000)    $(5,957,000)

b) The reframing of the question somehow complicated its workings and the solution provided here.