Case .3

On February 15, 2005, officers of Shane Corporation agreed with George Merlo, sole stockholder of Merlo Company and Merlo Industries, Inc., to acquire all his common stock ownership in the two companies as follows:

10,000 shares of Shane’s $1 par common stock (current fair value $30 a share) would be issued to George Merlo on February 28, 2005, for his 1,000 shares of $10 par common stock of Merlo Company. In addition, 20,000 shares of Shane common stock would be issued to George Merlo on February 28, 2010, if aggregate net income of Merlo Company for the five-year period then ended exceeded $300,000.

$250,000 cash would be paid to George Merlo on February 28, 2005, for his 10,000 shares of $1 par common stock of Merlo Industries, Inc. In addition $250,000 in cash would be paid to George Merlo on February 28, 2010, if aggregate net income of Merlo Industries, Inc., for the five-year period then ended exceeded $300,000.

Both Merlo Company and Merlo Industries, Inc., were to be merged into Shane on February 28, 2005, and were to continue operations after that date as divisions of Shane. George Merlo also agreed not to compete with Shane for the period March 1, 2005, through February 28, 2010. Because the merger was negotiated privately and George Merlo signed a “letter agreement” not to dispose of the Shane common stock he received, the business combination was not subject to the jurisdiction of the SEC. Out-of-pocket costs of the business combination may be disregarded.

Selected financial statement data of the three constituent companies as of February 28,2005 (prior to the merger), were as follows:

Shane CorporationMerlo CompanyMerlo Industries, Inc.

Total assets$25,000,000$ 500,000$ 600,000

Stockholders’ equity10,000,000200,000300,000

Net sales50,000,0001,500,0002,500,000

Basic earnings per share5303

The controller of Shane prepared the following condensed journal entries to record the merger on February 28, 2005:

Assets other than goodwill 600,000Goodwill 10,000Liabilities 300,000Common Stock 10,000Common Stock to Be Issued 20,000Paid-in Capital in Excess of Par 280,000

To record merger with Merlo Company, with identifiable assets and liabilities recorded at current fair values and goodwill recognized.

Assets 650,000

Goodwill 150,000

Liabilities 300,000

Payable to George Merlo 250,000

Cash 250,000

To record merger with Merlo Industries, Inc., with assets and liabilities of Merlo Industries, Inc., recorded at current fair values and goodwill recognized.

Instructions

Do you concur with the controller’s journal entries? Explain.