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  1. business
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  3. on 1/1/20x0, prospector, inc. paid $5,875,000 to a

On 1/1/20x0, Prospector, Inc. paid $5,875,000 to acquire 100% of the outstanding common stock of...

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Accounting

On 1/1/20x0, Prospector, Inc. paid $5,875,000 to acquire 100% of the outstanding common stock of Sinclair Company. After the acquisition, Sinclair will remain in business as a separate operating company. Additionally, Prospector, Inc. will account for their investment using the equity method.

At the acquisition date, Sinclair Corporations stockholders equity was as follows:

Sinclair Corporation

Statement of Shareholders' Equity

1/1/20x0

Retained earnings

$1,500,000

Common Stock

500,000

Total Shareholders Equity 1/1/20x0

$2,000,000

In addition, the fair value in excess of book value and the remaining useful lives of certain noncurrent assets/noncurrent liabilities of Sinclair Company at acquisition were:

  • Software licenses, (10-years): $2,500,000,
  • Unpatented technology (8 years): $800,000, and
  • Understatement of long-term debt (5 years): $100,000

The book value of all other assets and liabilities were equal to their fair values.

During 20x0, Sinclair reported net income of $480,000 while paying dividends of $25,000. During 20x1, Sinclair reported net income of $960,000 while paying dividends of $50,000.

  1. Record Prospector Inc.s acquisition of Sinclair Corporation at 1/1/20x0.

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