18 • 16 CONSOLIDATED FINANCIAL STATEMENTS AND BUSINESS COMBINATIONSAssume that the Packer Corp. acquires Summit Corp. on December 31, 2001 for a purchase price of
$1,200,000. The condensed financial statements of Summit for as of December 31, 2001, and for the year
then ended are given below;
Income Statement
For the Year Ended
December 31, 2001
Sales $400,000
Expenses _________(240,000)
Net income $160,000_________Statement of Financial Position
December 31, 2001
Book Value Fair ValueCash $100,000 $100,000
Accounts receivable 400,000 380,000
Inventory 650,000 675,000
Property, plant and equipment, net 1,150,000 1,195,000
Total Assets 2,300,000 2,350,000
Accounts payable 530,000 530,000
Long-term debt 790,000 740,000
Other liabilities 50,000 50,000
Total Liabilities 1,370,000 1,320,000
Common stock 620,000
Additional paid-in-capital 190,000
Retained earnings (including net income
of $140,000 for the year ended 12/31/01 120,000_ 1,030,000___
Total Equity 930,000_ 1,030,000___
Total Liabilities and Equity $2,300,000__ $2,350,000__
Assume that the accounts receivables’ fair value has been determined after a reassessment of the al-
lowance for doubtful accounts; the fair value of inventory and property, plant and equipment have been
determined after the review of current replacement cost; and the fair value of long-term debt is based on
the present value at current market rate of interest.
Solution: Packer Corp. would make the following journal entry to record the acquisition:
Cash 100,000
Accounts receivable 380,000
Inventory 675,000
Property, plant and equipment 1,195,000
Goodwill 170,000
Accounts payable 530,000
Long-term debt 740,000
Other liabilities 50,000
Cash 1,200,000Each of the assets acquired and assets assumed has been recorded at their fair value. The goodwill of
$170,000 is calculated as the difference between the amount paid for Summit of $1,200,000 and the fair
value of the net assets of Summit of $1,300,000. If financial statements were prepared immediately after
the acquisition the statement of financial position would show the combined amounts of Packer Corp.
accounts and Summit Corp. accounts. The combined statement of financial position would also reflect
the $170,000 Goodwill. The income statement, however, will reflect only the revenues and expenses of
Packer Corp. without any of the revenues or expenses of the Summit Corp.
Exhibit 18.2. Purchase Method.