Exercise 2 (LO 3) Asset compared to stock purchase. Glass Company is  thinking about acquiring Plastic Company. Glass Company is considering two methods of accomplish- ing control and is wondering how the accounting treatment will differ under each method. Glass Company has estimated that the fair values of Plastic’s net assets are equal to their book values, except for the equipment, which is understated by $20,000.

The following balance sheets have been prepared on the date of acquisition:

 

Assets                                                                                                  Glass                                                                  Plastic

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                 $540,000                                                      $  20,000

Accounts receivable . . . . . . . . . . . . . . .                                                              50,000                                                             70,000

Inventory . . . . . . . . . . . . . . . . . . . . . . . .                                                                    50,000                                                         100,000

Property, plant, and equipment (net) . . .                                                       230,000                                                            270,000

                                                                                                        

Total assets. . . . . . . . . . . . . . . . . . . . .                                                            $870,000                                                      $460,000

                                                                                                        

 

    Liabilities and Equity	Â
Current liabilities . . . . . . . . . . . . . . . . . .	$140,000	Â	$  80,000
Bonds payable . . . . . . . . . . . . . . . . . . . Stockholders’ equity: Common stock ($100 par). . . . . . . . .	250,000   200,000	Â	100,000   150,000
Retained earnings . . . . . . . . . . . . . . .	280,000	Â	130,000
Total liabilities and equity . . . . . . . . .	$870,000	Â	$460,000

 

                                                                                                        

 

1.     Assume Glass Company purchased the net assets directly from Plastic Company for

$530,000.

a.     Prepare the entry that Glass Company would make to record the purchase.

b.     Prepare the balance sheet for Glass Company immediately following the purchase.

2.     Assume that 100% of the outstanding stock of Plastic Company is purchased from the for- mer stockholders for a total of $530,000.

a.     Prepare the entry that Glass Company would make to record the purchase.

b.     State how the investment would appear on Glass’s unconsolidated balance sheet prepared immediately after the purchase.

c.    Indicate how the consolidated balance sheet would appear.