Hello, I need help with this case please:
All Star Cards and Bubble Gum Cards recently formed a New Company “Baseball Trading Cards” in order to combine their respective wholly-owned baseball trading card business. In connection with the formation of Baseball Trading Cards, All Star contributed its business in exchange for a 50%equity interest and $85 million in cash. Bubble Gum contributed its business and $105 million in cash in exchange for a 50% equity interest; $20 million of the cash contributed by Bubble Gum remained in Baseball Trading Cards for working capital purposes.
The fair value and book value of the business contributed by All Star is $650 million and $40 million, respectively, with fair value determined based on an independent, third-party valuation. All Star has no actual or implied commitment, financial or otherwise, to support the operations of Baseball Trading in any manner.
Baseball Trading is owned, operated, and jointly controlled by All Star and Bubble Gum as a separate, specific business for the mutual benefit of each party. Both All Star and Bubble Gum participate in the overall management of Baseball Trading Cards, and significant decisions require the consent of both parties so that neither All Star nor Bubble Gum has unilateral control. As a result, Baseball Trading Cards meets the definition of a joint venture in paragraph 3(d) of Accounting Principles Bulleting Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. Furthermore, the group of assets contributed by All Star and Bubble Gum meets the definition of a business as defined in EITF Issue No. 98-3, Determining Whether a Nonmonetary Transaction Involves receipt of productive assets or of a business.
Required: May All Star recognize a gain upon the contribution of its business in exchange for a 50% equity interest in Baseball Trading Cards and $85 million in cash? If gain recognition is appropriate, how should the gain be calculated? What journal entry should All Star record to reflect the contribution of its business in exchange for a $50 equity interest in Baseball Trading Cards and $85 million in cash?
To determine if All Star can recognize a gain upon the contribution of its business to Baseball Trading Cards, we need to consider the criteria for gain recognition in business combinations. According to the guidance in ASC 805-50-30-1, gain recognition is generally prohibited in a business combination unless a specific circumstance exists.
One of the circumstances where gain recognition is allowed is when the fair value of the consideration received exceeds the fair value of the net assets transferred. In this case, All Star received a 50% equity interest in Baseball Trading Cards and $85 million in cash. To determine whether a gain can be recognized, we need to compare the fair value of this consideration to the fair value of the net assets transferred.
The fair value of the business contributed by All Star is given as $650 million. However, it's important to note that the fair value of the net assets transferred is not explicitly mentioned in the case. We can assume that it is equal to the book value of $40 million because there is no indication that any other assets or liabilities were transferred.
Since the fair value of the consideration received ($85 million + 50% equity interest) exceeds the fair value of the net assets transferred ($40 million), All Star can recognize a gain as per the guidance in ASC 805-50-30-1.
To calculate the gain, we subtract the fair value of the net assets transferred from the fair value of the consideration received: $650 million - $40 million = $610 million.
The journal entry to reflect the contribution of All Star's business in exchange for a 50% equity interest in Baseball Trading Cards and $85 million in cash would be:
Debit: Investment in Baseball Trading Cards (50% equity interest) - $325 million ($650 million x 50%)
Debit: Cash - $85 million
Credit: Gain on Contribution of Business - $610 million
Credit: Accumulated Depreciation (if applicable) - $40 million
It's important to note that this is a simplified example, and actual journal entries may require additional accounts depending on the specific circumstances and applicable accounting standards. It is recommended to consult with a professional accountant or refer to the relevant accounting guidance for accurate and complete journal entries.