Problem: 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 to do:
Question 1: Prepare journal entries for Axel Corp. to record the acquisition of Wheal Company stock assuming (1) pooling accounting and (2) purchase accounting.
Question 2: 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.
Question 3: 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.