Question: On December 31, Year 7, Maple Company
On December 31, Year 7, Maple Company issued preferred shares with a fair value of $1,200,000 to acquire 24,000 (60%) of the common shares of Leafs Limited. The Leafs shares were trading in the market at around $40 per share just days prior to and just after the purchase by Maple. Maple had to and was willing to pay a premium of $10 per share, or $240,000 in total, in order to gain control over Leafs. The balance sheets for the two companies just prior to acquisition were as follows (in OOOs): 
Consolidated financial statements will be prepared to combine the financial statements for the two companies. The management of Maple is concerned about the valuation of goodwill on the consolidated financial statements. It was willing to pay a premium of $240,000 to gain control of Leafs. It maintains that it would have paid the same premium in total whether it acquired 60% or 100% of the shares of Leafs. Given that the return on assets is a closely monitored ratio by the shareholders, the management of Maple would like to minimize the value assigned to goodwill on consolidation. Management wants to see how the consolidated balance sheet would differ under three different theories of reporting: proprietary, parent company extension, and entity. Management also has the following questions when reporting this business combination: • How will we determine the value of the goodwill for the subsidiary? • How will this affect the valuation of NCI? • Will we have to revalue the subsidiary's assets and liabilities every year when we prepare the consolidated financial statements? • Which consolidation theory best reflects the economic reality of the business combination? Required: Prepare a consolidated balance sheet at the date of acquisition under the three theories, and respond to the questions asked by management.
Transcribed Image Text:
Мaple Leafs Carrying Fair Carrying Fair Amount Value Aтount Value Identifiable assets $4,000 $5,000 $2,000 $2,000 Goodwill ?? ?? $4,000 $2,000 $3,000 $1,600 400 Liabilities 3,200 1,680 Shareholders' equity 1,000 $4,000 ?? ?? $2,000
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