1. There is no question of control of a wholly owned subsidiary.

Thus, as an illustration assume that on

December 31, 2002, PALM Corporation issued 10,000 shares of its 10 par common stock (current fair value
Br 55 a share) to shareholder of STARR Company for all the outstanding Br 5 par common stock of Starr.
There was no contingent consideration. Costs of issuing common stock of the business combination paid by
Palm Corp on December 31, 2002 consisted of the following;
Costs of issuing common stock............................................................ 35,000
Assume also that the combination qualified for purchase accounting. Starr Company was to continue its
corporate existence as a wholly owned subsidiary of Palm Corporation. Both companies had a December 31
fiscal year and use the same accounting policies. Income tax rate for both companies was 40%. Financial
statements of the two companies as of December 31, 2002 prior to combination are presented below follow:
Palm Starr
Corporation Company
Income statement
Net sales.......................................................... Br 990,000 Br 600,000
Interest revenue............................................... 10,000 - 0-
Total Revenues............................................... 1,000,000 600,000
Cost & expenses:
Cost of goods sold........................................... 635,000 410,000
Operating expense........................................... 158,333 73,333
Interest expense............................................... 50,000 30,000
Income tax Expense........................................ 62,667 34,667
Total Costs and expenses................................ (906,000) (548,000)
Net income...................................................... 94,000 52,000
Statement of RES
Retained Earnings beginning of year.............. 65,000 100,000
Add: Net income............................................. 94,000 52,000
Less: dividends............................................... (25,000) (20,000)
Retained Earnings ending of year................... 134,000 132,000
Balance sheet
Assets:
Cash................................................................ Br100, 000 Br 40,000
Inventories...................................................... 150,000 110,000
Other current assets......................................... 110,000 70,000
Receivable from Starr Co................................ 25,000
Plant asset (net)............................................... 450,000 300,000
Patent (net)...................................................... -0- 20,000
Total ............................................................... 835,000 540,000
Liability and SHE:
Payable to Palm Corp...................................... 25,000
Income taxes payable...................................... 26,000 10, 000
Other liabilities............................................... 325,000 115,000
Common stock Br 10 par................................ 300,000
Common stock for Br 5 par............................. 200,000
Additional Paid in capital ............................... 50,000 58,000
Retained Earnings........................................... 134,000 132,000
Total liabilities and SHE................................. 835,000 540,000
On Dec, 31, 2002 current fair values of Starr Company’s identifiable assets and liabilities were the same as
their carrying amount, except for the following 3 assets:
Fair Values:
Inventories.............................................. Br 135,000
................................................................
................................................................
Plant assets (net)................................... Br 365,000
Patent (net)........................................... Br 25,000
2. To illustrate the consolidation techniques for a purchase type business combination involving a partially
owned subsidiary, assume the following facts:
On December 31,2003 Post Corporation issued 66,500 shares of its Br 1 par common stock (Current fair
value Br 20 a share ) to stockholders of Sage Company in exchange for 38,000 of the 40,000 outstanding
shares of Sage’s Br 10 par common stock Thus Post acquired 95% of the interest in Sage (38/40). The fair
value of NCI is Br 70,000. There was no contingent consideration. Cost of issuing shares of the combination
paid in cash by Post on December 31, 2003 were as follows:
 Cost of issuing shares....................................................................... 72,750
Financial statements of the two companies before the combination are as follows:
Income statement Post Sage
Corporation Company
Net sales ..........................................................................
Br 5,500,000 Br 1,000,000
Costs & Expenses:
Cost of goods sold...........................................................
3,850,000 650,000
Operating expense........................................................... 925,000 170,000
Interest expense...............................................................75,000 40,000
Income tax Expense......................................................... 260,000 56,000
Total Costs and expenses.................................................
(5,110,000) (916,000)
Net income.......................................................................
390,000 84,000
Statement of RES
Retained Earnings, beginning of year.............................. 810,000 290,000
Add: Net income..............................................................390,000 84,000
Sub-totals.........................................................................
1,200,000 374,000
Less: Dividends...............................................................
(150,000) (40,000)
Retained Earnings End of the year................................... 1,050,000 334,000
Balance Sheet
BALANCE SHEET
Post Sage
Corporation Company
Assets:
Cash ..............................................................Br 200,000 Br 100,000
Inventories..................................................... 800,000 500,000
Other current assets........................................ 550,000 215,000
Plant asset, (net) ............................................3,500,000 1,100,000
Goodwill (net)................................................ 100,000 __-0-
Total..............................................................5,150, 000 1,915,000
Liability and SHE:
Income taxes payable..................................... 100,000 16,000
Other liabilities.............................................. 2,450,000 930,000
Common stock Br 1 par................................. 1,000,000
Common stock for Br 10 par.......................... 400,000
Additional Paid in capital............................... 550,000 235,000
Retained Earnings......................................... 1,050,000 334,000
Total liabilities and SHE................................5,150, 000 1,915,000
On Dec, 31, 2003 current fair values of Sage company’s identifiable assets and liabilities were the same as
their carrying amount, except for the following assets:
Market Values
Inventories.............................................. Br 526,000
................................................................
................................................................
Plant assets (net)................................... Br1,290,000
Leasehold............................................. Br30,000