On December 31, Pacifica, Inc., acquired 100 percent of the voting stock of Seguros Company. Pacifica will maintain Seguros as a wholly owned subsidiary with its own legal and accounting identity. The consideration transferred to the owner of Seguros included 50,000 newly issued Pacifica common shares ($20 market value, $5 par value) and an agreement to pay an additional $130,000 cash if Seguros meets certain project completion goals by December 31 of the following year. Pacifica estimates a 50 percent probability that Seguros will be successful in meeting these goals and uses a 4 percent discount rate to represent the time value of money.
Immediately prior to the acquisition, the following data for both firms were available:
Seguros Company outstanding voting shares acquired by Pacifica Inc. 100%
Pacifica Company's $5 par common stock issued for acquisition - number of shares 50,000
Market value of Pacifica stock at acquisition date $ 20
Cash paid by Pacifica when Seguros meets certain goals $ 130,000
Fair value of Seguros R & D project $ 100,000
Probability that Seguros will meet goals 50%
Discount rate used to represent time value of money 4%
Legal fees paid by Pacifica in connection with acquisition $ 15,000
Stock issuance costs paid by Pacifica $ 9,000
Seguros Company
Book Fair
Pacifica, Inc. Values Values
Revenues $ (1,200,000) Expenses 875,000 Net income $ (325,000) Retained earnings, 1/1 $ (950,000) Net income (325,000) Dividends paid 90,000 Retained earnings, 12/31 $ (1,185,000) Cash $ 110,000 $ 85,000 $ 85,000
Receivables and inventory 750,000 190,000 180,000
Property, plant, and equipment 1,400,000 450,000 600,000
Trademarks 300,000 160,000 200,000
Total assets $ 2,560,000 $ 885,000 Liabilities $ (500,000) $ (180,000) $ (180,000)
Common stock (400,000) (200,000) Additional paid-in capital (475,000) (70,000) Retained earnings (1,185,000) (435,000) Total liabilities and equities $ (2,560,000) $ (885,000)
