Advanced Placement (AP)
On July 20x1, P Co purchased 1,500,000 shares from S Co's existing owners. The totalnumber of shares issued by S Co was 2,000,000. A reliable measure of the fair value of S Co's share was $10.00 per share. P Co was obligated to pay an additional $1,000,000 to the vendors of S Coif S Co maintained existing profitability over the subsequent two years from 1 July 20x1. It was highly likely that S Co would achieve this expectation and the fair value of the contingent consideration was assessed at $1,000,000. Fair value of non-controlling interests as at July 20x1 was $5,000,000. The identifiable net assets of S Co as at July 20x1 are shown below. Tax effects on fair value differences have not yet been recognized. The tax effects on fair value differences are to be recognized on the basis that the tax bases of the identifiable assets acquired and liabilities assumed are not affected by the business combination. Assume a tax rate of 20%.S CoS CoS CoPlant and equipment....In-process research and development.Other intangible assets..InventoryAccounts receivable..Cash.Total assets.Current and long-term liabilitiesContingent liabilities Total liabilities...Net assetsShare capital..Retained earnings.. Shareholders' equity.Book value $3,000,00001.200,00050,000$5,150,000$1,500,0000$1,500,000$3,650,000$2,000,0001,650,000 $3,650,000Fair value Fair value less BV$2,800,000$(200,000)2,500,0001,300,000650,000150.000350,000 50,000(50,000) 0$ 16,350,000 $11.200.000$1,500,000$2,000,000$500,000$ 14,350,000 $10,700,000$0Required:1. Determine the acquirer's interest in the acquiree.2. Determine the fair value of consideration transferred.3. Determine goodwill arising from the acquisition.4. Prepare the consolidation entry to eliminate investment in S Co as at acquisition date.