On February 15, 2005, officers of Sun Corporation agreed with George Merlo, sole stockholderof…

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

1. 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 Sun 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.

2. $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 Sun on February28, 2005, and were to continue operations after that date as divisions of Sun.George Merlo also agreed not to compete with Sun for the period March 1, 2005,through February 28, 2010. Because the merger was negotiated privately and George Merlosigned a “letter agreement” not to dispose of the Sun common stock he received, thebusiness combination was not subject to the jurisdiction of the SEC. Out-of-pocket costs ofthe 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:

	Sun Corporation	Merlo Company	Merlo Industries, Inc.
Total assets	$25,000,000	$ 500,000	$ 600,000
Stockholders’ equity	10,000,000	200,000	300,000
Net sales	50,000,000	1,500,000	2,500,000
Basic earnings per share	5	30	3

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

Assets other than goodwill 600,000

Goodwill 10,000

Liabilities 300,000

Common Stock 10,000

Common Stock to Be Issued 20,000

Paid-in Capital in Excess of Par 280,000

To record merger with Merlo Company, with identifiable assets andliabilities 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 andliabilities of Merlo Industries, Inc., recorded at current fairvalues and goodwill recognized.

Instructions

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