Company acquistion: purchase and pooling methods
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Axel Corporation acquires 100% of the stock of Wheal Company on December 31, Year 4. The following information pertains to Wheal Company on the date of acquisition:
Book Value Fair Value
Cash......................................................... $ 40,000 $ 40,000
Accounts receivable.................................. 60,000 55,000
Inventory................................................... 50,000 75,000
Property, plant, and equipment (net)........ 100,000 200,000
Secret formula (patent) ............................ - 30,000
Total assets .............................................. $250,000 $400,000
Accounts payable ..................................... $ 30,000 $ 30,000
Accrued employee pensions...................... 20,000 22,000
Long-term debt......................................... 40,000 38,000
Capital stock ............................................ 100,000 -
Other contributed capital ......................... 25,000 -
Retained earnings .................................... 35,000 -
Total liabilities and equity ........................ $250,000 $ 90,000
Axel Corporation issues $110,000 par value ($350,000 market value on December 31, Year 4) of its own stock to the shareholders of Wheal Company to consummate the transaction, and Wheal Company becomes a wholly owned, consolidated subsidiary of Axel Corporation.
Required:
a. Prepare journal entries for Axel Corp. to record the acquisition of Wheal Company stock assuming (1) pooling accounting and (2) purchase accounting.
b. Prepare the worksheet entries for Axel Corp. to eliminate the investment in Wheal Company stock in preparation for a consolidated balance sheet at December 31, Year 4 assuming (1) pooling accounting and (2) purchase accounting.
c. Calculate consolidated retained earnings at December 31, Year 4 (Axel's retained earnings at this date are $150,000), assuming:
(1) Axel Corp. uses the pooling method for this business combination.
(2) Axel Corp. uses the purchase method for acquisition of Wheal Company.
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