Company A, Inc. is a distributor of office equipment. Company A has a wholly owned susidiary, JK, a equipment manufacturer. Company A has been talking to company B about forming a new business entity. Company B is also a distributor of office equipment, and has a wholly owned manufacturing subsidary called Nogo. Company A and B have agreed thet they will exchange their entire interest in their wholly owned subsidairies, jk and Nogo. This new corporation would recieve both subsidiaries and issue 50% stock to Company A, and 50% stock to company B. The Fair value of the net assets of each subsidiary exceeds its book value, and the relative net book values and fair values of the two subsidiarse are not proportional. However, through negotiation Company A and B believe their contributions to the newly formed corporation would be equal in value inspite of this disproportional relationship.
The fair value of a 50% interest in the new corporation would exceed the carrying value of Company A's investment in Company B.
1) Discuss how Co. A chould account for the exchnge of its wholly owned subsidiary, JK, for a 50% interest in the newly formed company?
2) Discuss how Co. A should account for its 50% interets in the newly formed corporation subsequent to the exchange?
3) Discuss how the newly formed corporation should account for the assets it recieved in the exchange transaction?
Amalgamation Problem