Contingent consideration. Dodd Corporation is purchasing the net assets, exclusive of cash, of Walsh Company as of January 1, 20X1, at which time Walsh Company’s balance sheet is as follows:
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Assets |
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Current assets: |
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Cash |
$30,000 |
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Accounts receivable |
50,000 |
$80,000 |
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Noncurrent assets: |
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Investments in marketable securities |
$120,000 |
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Land |
600,000 |
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Buildings (net) |
450,000 |
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Equipment (net) |
800,000 |
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Goodwill |
100,000 |
2,070,000 |
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Total assets |
$2,150,000 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
$150,000 |
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Income tax payable |
190,000 |
$340,000 |
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Equity: |
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Common stock ($5 par) |
$1,200,000 |
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Retained earnings |
610,000 |
1,810,000 |
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Total liabilities and equity |
$2,150,000 |
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Dodd Corporation feels that the following fair values should be substituted for Walsh’s book values:
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Accounts receivable |
$60,000 |
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Investment in marketable securities |
150,000 |
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Land |
450,000 |
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Buildings |
450,000 |
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Equipment |
600,000 |
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Accounts payable |
120,000 |
Dodd will issue 20,000 shares of its common stock with a $2 par value and a quoted fair value of $60 per share on January 1, 20X1, to Walsh Company to acquire the net assets. Dodd also agrees that two years from now it will issue additional securities to compensate Walsh for any decline in value below that on the date of issue.
Required
1. Record the purchase on the books of Dodd Corporation on January 1, 20X1. Include support for calculations used to arrive at the values assigned to the assets and liabilities. Use price zone analysis to aid your solution.
2. Indicate the disclosure that would be necessary in the financial statements of Dodd Corporation on December 31, 20X1, assuming the quoted value of the stock is $62 per share.
3. Record payment (if any) of contingent consideration on January 1, 20X3, assuming that the quoted value of the stock is $57.50. (Round shares to nearest whole share.)