Advanced Financial Accounting Assignment

1. The condensed balance sheet of Maxim Company on December 31, 2014, prior to the
business combination with Sorrel Corporation, was as follows:

MAXIM COMPANY
Balance Sheet (prior to business combination)
December 31, 2014
Assets
Current assets $ 400,000
Plant assets (net) 1,200,000
Other assets (none intangible) 200,000
Total assets $1,800,000

Liabilities and Stockholders’ Equity

Current liabilities $ 300,000
Common stock, $1 par 400,000
Additional paid-in capital 200,000
Retained earnings 900,000
Total liabilities and stockholders’ equity $1,800,000

On December 31, 2014, Sorrel issued 800,000 shares of its $1 par common stock (current fair
value $3 a share) for all the outstanding common stock of Maxim in a statutory merger. Also
on December 31, 2014, Sorrel paid the following out-of-pocket costs of the business
combination with Maxim:
Finder’s and legal fees relating to business combination $30,000
Costs associated with SEC registration statement 40,000
Total out-of-pocket costs of business combination $70,000

On December 31, 2014, the current fair values of Maxim’s other assets and current liabilities
equaled their carrying amounts; current fair values of Maxim’s current assets and plant assets
were $500,000 and $1,500,000, respectively.
Required: Prepare journal entries for Sorrel Corporation on December 31, 2014, to record the
business combination with Maxim Company.
2. On October 31, 2005, Pagel Corporation acquired 83% of the outstanding common stock of
Sayre Company in exchange for 50,000 shares of Pagel’s $2 par value ($10 current fair value

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 a share) common stock. There was no contingent consideration. Out-of-pocket costs of the
business combination paid by Pagel on October 31, 2005, were as follows:
Legal and finder’s fees related to business combination $34,750
Costs associated with SEC registration statement for Pagel’s common stock 55,250
Total out-of-pocket costs of business combination $90,000

Current fair values of Sayre’s identifiable net assets were the same as their carrying amounts on
October 31, 2005, except for the following:
Current Fair Values
Inventories $ 620,000
Plant assets (net) 1,550,000
Patents (net) 95,000
Instructions:
A. Prepare Pagel Corporation’s journal entries on October 31, 2005, to record the business
combination with Sayre Company.
B. Prepare elimination entry on October 31, 2005, and consolidated balance sheet of Pagel
Corporation and subsidiary.

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3. The separate balance sheets of Painter Corporation and Sawyer Company following their
business combination, in which Painter acquired all of Sawyer’s outstanding common stock,
were as follows:
PAINTER CORPORATION AND SAWYER COMPANY
Separate Balance Sheets (following business combination)
May 31, 2005
Painter Corporation Sawyer Company
Assets
Inventories $ 60,000 $ 30,000
Other current assets 140,000 110,000
Investment is Sawyer Company common stock 250,000 0
Plant assets (net) 220,000 160,000
Goodwill (net) 10,000 0
Total assets $680,000 $300,000
Liabilities and Stockholders’ Equity
Current liabilities $100,000 $70,000
Bonds payable 104,000 30,000
Common stock, $1 par 200,000 80,000
Additional paid in capital 116,000 70,000
Retained earnings 160,000 50,000
Total Liabilities and Stockholders’ equity $680,000 $300,000
On May 31, 2005, the current fair values of Sawyer’s inventories and plant assets (net) were
$40,000 and $180,000, respectively; the current fair values of its other assets and its liabilities
were equal to their carrying amounts.

Required: Prepare a consolidated balance sheet for Painter Corporation and subsidiary on May
31, 2005, without using a working paper.

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4. The working paper elimination (explanation omitted) on the date of the Pulp Corporation
Stump Company business combination was as follows:
PULP CORPORATION AND SUBSIDIARY
Working Paper Elimination
January 31, 2005
Common Stock, no par or stated value —Stump 100,000
Retained Earnings—Stump 180,000
Inventories (first-in, first-out cost)—Stump 20,000
Plant Assets—Stump (depreciable, 5-year life)—Stump 100,000
Goodwill—Stump 40,000
Investment in Stump Company Common Stock—Pulp 440,000
For the fiscal year ended January 31, 2006, Stump had a net income of $240,000, and on that
date it declared and paid a dividend of $120,000. Stump includes plant asset depreciation
expense in cost of goods sold. The consolidated goodwill was unimpaired.
Required:
A. Prepare journal entries for Pulp Corporation on January 31, 2006, to record the operations
of Stump Company under the equity method of accounting.
B. Prepare elimination entry, for Pulp Corporation and subsidiary on January 31, 2006.