Compute consolidated expenses immediately following the acquisition

A) $2,760.

B) $2,770.

C) $2,785.

D) $3,380.

E) $3,390.

Answer: B

Learning Objective: 02-06a

Learning Objective: 02-06b

Learning Objective: 02-07

Topic: Costs of combination

Topic: Acquisition―Calculate consolidated balances

Topic: Consolidation worksheet

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $2,760 + $10 = $2,770

REFERENCE: 02-07

Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2017, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company’s net assets at that date.

Boxwood

Tranz Co.

(all amounts in thousands)

Book Value

Fair Value

12/31/17

Cash

$ 870

$ 240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

( 570)

( 240)

Accrued expenses

( 270)

( 60)

Long-term liabilities

(2,700)

(1,020)

(1,120)

Common stock ($20 par)

(1,980)

Common stock ($5 par)

( 420)

Additional paid-in capital

( 210)

( 180)

Retained earnings

(1,170)

( 480)

Revenues

(2,880)

( 660)

Expenses

2,760

620

Note: Parenthesis indicate a credit balance

Assume a business combination took place at December 31, 2017. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz’s fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz’s earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands).