Park Corporation Acquired the Voting Stock of Sun Corporation on January

Essay

Park Corporation acquired the voting stock of Sun Corporation on January 2, 2021. Sun Corporation's trial balance at the date of acquisition is as follows:
$$\begin{array} { | l | r | } \hline & \text { Dr (Cr) } \\\hline \text { Cash and receivables } & \$ 400 \\\hline \text { Inventories } & 500 \\\hline \text { Property, plant and equipment, net } & 4,500 \\\hline \text { Accounts payable } & ( 300 ) \\\hline \text { Long-term debt } & ( 3,800 ) \\\hline \text { Capital stock } & ( 1,200 ) \\\hline \text { Treasury stock } & 50 \\\hline \text { Retained earnings } & ( 135 ) \\\hline \text { Accumulated other comprehensive income } & ( 15 ) \\\hline \text { Total } & \underline {\$0 } \\\hline\end{array}$$ An analysis of Sun's assets and liabilities reveals that book values of some reported items do not reflect their fair values at the date of acquisition:
•Inventories are undervalued by $300.
•Property, plant and equipment is overvalued by $1,000.
•Long-term debt is undervalued by $50.
The inventories are reported using FIFO, and acquisition-date inventories were sold in 2021. Property, plant and equipment has a 10-year remaining life, straight-line. The long-term debt has an average remaining term of two years, and the premium is straight-line amortized.
The following items are not currently reported on Sun's balance sheet:
•Favorable lease agreements, valued at $25.
•Signed customer contracts for product development, valued at $22.
•In-process research and development, valued at $120.
•There are lawsuits pending against Sun. The best estimate of likely losses on these lawsuits, at present value, is $7.
The in-process research and development is an indefinite life intangible. The lease agreements have limited lives of 5 years, and customer contracts have limited lives of two years, both amortized on a straight-line basis.
On January 2, 2021, Park issued stock with a market value of $1,000 for all of the voting stock of Sun. Registration fees in connection with issuing the stock are $100, paid in cash. Consulting, accounting, and legal fees connected with the merger are $250, paid in cash. In addition, Park enters into an earnings contingency agreement, whereby Park will pay the former shareholders of Sun an additional amount if Sun's performance meets certain minimum levels. The present value of the contingency is estimated at $200.
It is now December 31, 2021. No impairment occurs in 2021 on the in-process research and development or acquired goodwill. The pending lawsuit value has not changed. The earnings contingency has also not changed in value.
Sun reported net income of $500 in 2021, and paid no dividends. Its shareholders' equity at December 31, 2021 is as follows:
$$\begin{array} { | l | c | } \hline { \text { Shareholders' Equity, December 31, 2021 } } \\\hline \text { Capital stock } & \$ 1,200 \\\hline \text { Treasury stock } & \{ 50 \} \\\hline \text { Retained earnings } & 635 \\\hline \text { Accumulated other comprehensive income } & \underline{ 10 }\\\hline \text { Total } & \$ 1,795 \\\hline\end{array}$$ Required
a. Calculate Park's acquisition cost for its investment in Sun, and the initial balance for goodwill.
b. Calculate equity in net income of Sun for 2021.
c. Calculate the December 31, 2021 balance in Investment in Sun, on Park's books.
d. Prepare the consolidation working paper eliminating entries for 2021.