Carnes has the following account balances as of May 1, 2010 before an acquisition transaction takes place. The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On May 1, 2010, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) common stock in exchange for all of the shares of Carnes' common stock. Riley paid $10,000 for costs to issue the new shares of stock. Before the acquisition, Riley has $700,000 in its common stock account and $300,000 in its additional paid-in capital account. What will be Riley's balance in its common stock account as a result of this acquisition?

Question

Carnes has the following account balances as of May 1, 2010 before an acquisition transaction takes place.  The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On May 1, 2010, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) common stock in exchange for all of the shares of Carnes' common stock. Riley paid $10,000 for costs to issue the new shares of stock. Before the acquisition, Riley has $700,000 in its common stock account and $300,000 in its additional paid-in capital account. What will be Riley's balance in its common stock account as a result of this acquisition?

Quizplus · Accepted Answer

The first step is to calculate the fair value of the net assets acquired:

Fair value of Land = $650,000 
Fair value of Buildings = $550,000 
Total Fair value of Net Assets = $1,200,000

Next, we need to calculate the amount of goodwill that will be recognized in the acquisition.

Purchase price = 30,000 shares x $25 per share = $750,000 
Less: Costs to Issue Shares = $10,000 
Total cost of acquisition = $740,000

Goodwill = Total cost of acquisition - Fair value of net assets acquired = $740,000 - $1,200,000 = -$460,000 (negative goodwill)

Since we have negative goodwill, we need to allocate the purchase price to the net assets acquired based on their fair values.

Fair value of Land / Total Fair value of Net Assets = 54.17% 
Fair value of Buildings / Total Fair value of Net Assets = 45.83%

Allocation of Purchase Price:

Land = 54.17% x $740,000 = $401,878 
Buildings = 45.83% x $740,000 = $338,122

Finally, we can calculate the balance in Riley's common stock account as a result of the acquisition:

Balance in Common Stock Account = Par value of shares issued + Additional paid-in capital from shares issued

Par value of shares issued = 30,000 shares x $10 par value per share = $300,000

Additional paid-in capital from shares issued = Total cost of acquisition - Par value of shares issued - Costs to issue shares 
= $740,000 - $300,000 - $10,000 = $430,000

Therefore, the balance in Riley's common stock account will be:

Balance in Common Stock Account = $300,000 + $430,000 = $730,000

However, before the acquisition Riley had $700,000 in its common stock account.

Therefore, the balance in Riley's common stock account as a result of the acquisition will be:

Balance in Common Stock Account = $700,000 + $430,000 = $1,130,000

But since the question is asking for the balance in Riley's common stock account after the acquisition, the correct answer is:

C) $1,000,000.

Carnes Has the Following Account Balances as of May 1