Acquisition of Starling by Padmore — Notes and worked outline (date of acquisition)

Below are study notes in bullet-point format covering the acquisition of Starling by Padmore, focusing on the date-of-acquisition accounting under the acquisition (or consolidation) method. Numbers are taken from the provided transcript with the fair-value adjustments specified in the “Additional information.” Where necessary, explanations show the logic and formulas used to reach the results.

Key concepts covered:

• Acquisition differential (purchase price vs. fair value net assets)
• Fair-value adjustments to identifiable assets (and effect on net assets)
• Goodwill calculation
• Journal entries to record the investment and to eliminate the subsidiary in consolidation
• Outline of a consolidation worksheet post-acquisition

Important definitions and formulas

• Fair value adjustments (FV adj) are applied to Starling’s identifiable assets at acquisition date to align with their fair values:
  • Inventory FV adjustment = FV − BV = $423,600 − $327,600 = +$96,000
  • PPE (equipment) FV adjustment = FV − NBV = $604,000 − $505,000 = +$99,000
  • Land FV adjustment = FV − BV = $189,000 − $265,000 = −$76,000
  • Customer list FV adjustment = FV − BV (Starling’s customer list assumed BV = 0 unless otherwise stated; FV = $150,000) = +$150,000
  • Remainder PPE FV = BV (no adjustment)
• Net assets at fair value (FV net assets) = FV of identifiable assets − FV of liabilities
• Acquisition cost (consideration transferred) = Cash paid for 100% of Starling = $1,300,000
• Acquisition differential (goodwill) = Purchase price − FV net assets
• If there is no non-controlling interest, NCI = 0 for a 100% acquisition

1) Acquisition differential schedule (date of acquisition)

• Basis: compute the FV net assets of Starling and compare with Padmore’s payment of $1,300,000. The schedule uses the given fair-value adjustments to assets and the stated liabilities to derive FV net assets.

Key inputs (from the transcript and its add’l information):

• Starling assets (book values) total: $2,325,600
• Starling liabilities (as given in the transcript; used for FV net assets): total liabilities ≈ $1,558,800
• Equity of Starling (from SFP) ≈ $766,800 (noting the transcript shows some ambiguity in allocations; we proceed with the net assets approach below)
• FV adjustments to identifiable assets (Starling):
  • Inventory: +$96,000
  • Equipment (NBV $505,000 → FV $604,000): +$99,000
  • Land: −$76,000
  • Customer list: +$150,000
• Net FV adjustment to assets = +$96,000 + $99,000 − $76,000 + $150,000 = +$169,000
• FV assets after adjustments = $2,325,600 + $169,000 = $2,494,600
• FV liabilities (assumed from transcript): $1,558,800
• FV net assets (after adjustments) = $2,494,600 − $1,558,800 = $935,800
• Purchase price (Padmore’s consideration) = $1,300,000
• Goodwill (acquisition differential) = $1,300,000 − $935,800 = $364,200

Acquisition differential schedule (summary)

• FV of identifiable net assets at acquisition: $935,800
• Purchase price: $1,300,000
• Excess of purchase price over FV net assets (Goodwill): $364,200
• Net asset value after FV adjustments (for reference): $935,800
• Net effect (acquisition differential) = $364,200 (Goodwill)

Notes on the calculations

• The adjusted FV assets (+$169,000) come from the given FV changes: inventory (+$96k), equipment (+$99k), land (−$76k), and the customer list (+$150k).
• The FV net assets (after adjustments) are obtained by subtracting the fair-value liabilities from the adjusted FV assets. The liabilities figure is taken from the transcript; if the actual balance differs, FV net assets and goodwill will change accordingly.
• Since Padmore acquired 100% of Starling, there is no non-controlling interest in this case.

2) Journal entry to record Padmore’s investment in Starling (date of acquisition)

• The entry to record the cash payment for the acquisition is straightforward:
• Dr Investment in Starling 1,300,000
• Cr Cash 1,300,000
• This records the consideration transferred for the acquisition. The subsequent steps (investment elimination, fair-value adjustments to Starling’s assets and liabilities, and goodwill recognition) occur in consolidation entries rather than in Padmore’s standalone journal as part of the acquisition process.

3) Investment elimination entry and consolidation worksheet (immediately after acquisition)

• Purpose of elimination entries: remove Starling’s equity from the consolidated books and replace it with Padmore’s investment and the fair-value adjustments to assets and liabilities; recognize goodwill arising from the acquisition; prepare a consolidated statement that reflects the combined entity.
• Typical elimination structure (illustrative; exact numeric balancing depends on the precise unconsolidated equity balances and the fair-value adjustments applied):
  • Step 1: Eliminate Starling’s equity against Padmore’s investment
  • Dr Common shares – Starling ??? (Starling’s common shares) 70,800
  • Dr Retained earnings – Starling ??? 580,800
  • Dr (Other Starling equity accounts, if any) ???
  • Cr Investment in Starling 1,300,000
  • Cr Goodwill 364,200
  • Cr (Other adjustments to bring to FV net assets) ???
  • Step 2: Apply fair-value adjustments to Starling’s assets and liabilities in consolidation (to reflect fair values at acquisition date)
  • Dr Inventory (FV adjustment) 96,000
  • Dr PPE (FV adjustment, equipment) 99,000
  • Dr Customer list (FV) 150,000
  • Dr Land (FV adjustment) 76,000 (note: negative FV adjustment is a credit if recorded as a revaluation downward)
  • Cr Acquisition-related liability or related accounts as needed to balance
  • Step 3: Record goodwill arising from acquisition (already identified as $364,200)
  • Dr Goodwill 364,200
  • Cr (offset with the above elimination and asset/liability adjustments as needed)

Notes on the elimination entry approach

• In consolidated statements, you generally eliminate the investment in Starling against Starling’s equity balances (common shares + retained earnings + other equity) so that the parent’s balance sheet reflects the investment as part of the equity of the consolidated group, not as a separate asset.
• The difference between the purchase price and the fair-value net assets becomes goodwill, which is debited to Goodwill on consolidation.
• The FV adjustments to Starling’s identifiable assets and liabilities are recorded in the consolidation worksheet (not as separate entries on Padmore’s ledger) to adjust the subsidiary’s assets to their fair values on the acquisition date.
• Non-controlling interest (NCI) would be involved if Padmore acquired less than 100% of Starling; here it is 100%, so NCI = 0.

Consolidation worksheet outline (post-acquisition)

• Consolidated assets
  • Padmore assets (as is from the transcript) + FV adjustments to Starling assets + Goodwill – elimination of Starling’s investment
• Consolidated liabilities
  • Sum of Padmore liabilities + Starling liabilities (adjusted to fair value if any)
• Consolidated equity
  • Padmore’s equity + Starling’s equity eliminated in the consolidation process, replaced by the equity structure of the consolidated entity
• Key consolidated figures (illustrative; you would fill in exact numbers once the precise starting balances are confirmed):
  • Consolidated total assets = Padmore assets + FV-adjusted Starling assets + Goodwill – (investment elimination)
  • Consolidated total liabilities = Padmore liabilities + Starling liabilities (adjusted as needed)
  • Consolidated equity = (Padmore equity + Starling equity eliminated) + Goodwill (as a separate asset on the balance sheet of the consolidated group)

Practical tips for exam problems like this

• Always start by identifying the fair-value adjustments to the subsidiary’s identifiable assets and liabilities given in the problem. List them clearly and compute their net effect on identifiable assets.
• Compute FV net assets of the subsidiary as of acquisition date: FV assets − FV liabilities.
• Compute goodwill as:
  ext{Goodwill} = ext{Purchase price} - ext{FV net assets}
• If you are given a 100% acquisition, NCI = 0; if not, be prepared to compute NCI using fair value of the non-controlling interest or the proportionate share of net identifiable assets.
• For the acquisition differential schedule, present:
  • The FV adjustments to each asset (with the sign indicating increase/decrease to FV)
  • The resulting FV of assets after adjustments
  • The FV of liabilities (as given or as adjusted, if applicable)
  • The FV net assets
  • The purchase consideration
  • The goodwill (and any residual difference that becomes a gain or loss on acquisition if applicable)
• In the journal entries, separate the investment recording (the parent’s entry) from the consolidation eliminations. The elimination entries remove the subsidiary’s equity and the investment against the assets and equity, and they recognize goodwill on consolidation.
• Always note any indefinite-lived intangibles (like a customer list) that are not amortized, and ensure their FV is reflected without amortization in the consolidation process.

If you’d like, I can redraw the acquisition differential schedule and the consolidation entries using a clean, fully balanced set of numbers (starting from the exact book balances of Starling and Padmore as you have them) to give you a precise, fully balanced worksheet. The key structure and the main results (FV net assets = $935,800; Goodwill = $364,200) should hold with the fair-value adjustments specified, assuming the liabilities figure used aligns with the transcript.