Assume the parent company acquires its subsidiary in a "nontaxable" transaction by exchanging 60,000 shares of its $2 par value Common Stock, with a fair value on the acquisition date of $25 per share, for all of the outstanding voting shares of the investee. In its analysis of the investee company, the fair value of each of the subsidiary’s assets and liabilities equals their respective book values except for Property, Plant and Equipment (PPE) assets that are undervalued by $100,000, an unrecorded Customer List with a fair value of $160,000, and an unrecorded Brand Name asset valued at $240,000. And, finally, assume the tax bases of the subsidiary’s pre-acquisition identifiable net assets equal their book values. The parent company’s effective tax rate is 20%.

a. Prepare the journal entry that the parent makes to record the acquisition.
b. Given the following acquisition-date balance sheets for the parent and its subsidiary, prepare the consolidation spreadsheet.

Balance Sheet Parent Subsidiary

Assets

Cash $ 200,000 $ 80,000

Accounts receivable 300,000 120,000

Inventory 700,000 600,000

Equity investment 1,500,000 —

(PPE), net 2,000,000 1,000,000

Totals $4,700,000 $1,800,000

Liabilities and stockholders’ equity

Accounts payable $ 150,000 $ 120,000

Accrued liabilities 250,000 200,000

Long-term liabilities 1,600,000 600,000

Common stock 500,000 80,000

APIC 1,000,000 200,000

Retained earnings 1,200,000 600,000

Totals $4,700,000 $1,800,000

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