hilton4e_sm03

Chapter 3

Business Combinations

Copyright 2005 McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual, Chapter 3 52

REVIEW QUESTIONS

1. The key element that must be present in a business combination is one company gaining

control over the net assets of another company.

2. There are basically two forms of business combinations. These are (1) the purchase of

the net assets of another company, and (2) the acquisition of enough voting shares of

another company to control the use of its net assets. The form itself does not determine

the accounting for the combination because effective July 1 2001 only a single method

(the purchase method) can be use to account for the combination.

3. A statutory amalgamation is a legal form of combination, whereby only one of the

companies involved survives. Therefore, it is really a purchase of net assets with voting

shares as the means of payment.

4. The identification of an acquirer was the basic condition that determined whether

purchase or pooling accounting had to be used. If an acquirer could be identified, the

purchase method had to be used. If an acquirer could not be identified, the pooling of

interests method had to be used.

5. If the means of payment is cash, the company that makes the payment is identified as

the acquirer. If the means of payment is the issue of shares, an examination is made as

to the extent of the shareholdings of two distinct groups of shareholders. If the

shareholders of one of the combining companies as a group hold greater than 50% of the

voting shares of the combined company, that company is identified as the acquirer.

When an acquirer cannot be determined in this manner, an additional examination is

made of the composition of the board of directors and the management of the combined

company to see if one of the combining companies dominates, and thus can be identified

as the acquirer. Often (but not always) the acquirer is the larger company, and the

company that issues the shares.

6. Acquisition cost consists of the sum of the cash paid, the present value of any debt

instruments issued, the fair market value of any shares issued and any direct expenses Copyright 2005 McGraw-Hill Ryerson Limited. All rights reserved.53 Modern Advanced Accounting in Canada, Fourth Edition

involved in the combination. This total acquisition cost is compared with the sum of the

acquirer's share of the fair market value of the individual identifiable assets and liabilities

of the acquired company. If the acquisition cost is greater than the acquirer's interest in

the identifiable assets and liabilities acquired, the excess is recorded as goodwill. If the

acquisition cost is less than the acquirer's interest in the identifiable assets and liabilities

acquired, the result is negative goodwill, which is allocated to reduce the fair values

assigned to the non-current assets of the acquired company. The balance sheet

immediately after the business combination consists of the book value of the assets and

liabilities of the acquiring company, plus the book values of the assets and liabilities of

the acquired company, plus the acquirer's share of the excess of the fair values of the

assets and liabilities of the acquired company over their related book values, plus any

goodwill that arose on the combination. Shareholders' equity is that of the acquirer.

Subsequent net income consists of the acquirer's net income plus the acquirer's share of

the net income of the acquiree earned since acquisition date, subject to some adjustment

(for the amortization of the purchase discrepancy.)

7. The balance sheet components of the companies that are party to the business

combination are combined at their book values and no goodwill is recorded. This means

that components of shareholders' equity are also combined. Net income in the year of

acquisition consists of the net incomes of the parties to the combination, and prior years'

comparative statements are retroactively adjusted as if the companies had always been

combined.

8. Under the new entity method the net assets brought into the combination by the

companies involved are combined at fair values. The justification for this treatment is that

a new entity has been created and fair values represent acquisition cost to this new

entity.

9. If the other company is allowed to continue as a single shareholder of the issuing

company, it may be in a position to dominate. When this other company is wound up, the

shares of the issuing company are distributed to the shareholders of this other company,

and domination by one or two shareholders is thus less likely.


10. A purchase discrepancy is the difference between a parent company's acquisition cost

and the parent's share of the book values of the net assets and liabilities of its subsidiary.

It does not appear on the consolidated balance sheet as a single amount, but rather is

allocated to revalue the individual identifiable assets and liabilities of the subsidiary, and

any positive remaining balance is reflected as goodwill.

11. A substantial difference could occur in the gain (or loss) recorded in the sale. Under the

purchase method, the acquired assets are recorded at their fair values; under the pooling

of interests method, they are recorded at their book values. If there was a difference

between fair values and book values on the acquisition date, the subsequent sale would

yield different gains (or losses) under each method.

12. Great Britain, Germany, Japan and Korea allow pooling to be used but the IASB does

not. When the European Union countries adopt International standards in 2005, pooling

will be used only by a small number of countries.

Copyright 2005 McGraw-Hill Ryerson Limited. All rights reserved.55 Modern Advanced Accounting in Canada, Fourth Edition

MULTIPLE CHOICE

1. a

2. d

3. c

4. b

5. c

6. a

7. b ( 2,175,000 + 1,042,500) not including goodwill of 112,500

8. c (450,000 + 750,000)

9. a

10. b

11. d

A brief description of the major points covered in each case and problem.

Case 1

Intercorporate investments involving five companies are outlined and the student is required to

discuss the accounting treatment for the various types of investments.

Case 2

Two companies have agreed to form a third company that will issue shares for each

company’s net assets. A report is required which discusses the accounting implications.

Case 3 (prepared by J. C. (Jan) Thatcher of Lakehead University, and Margaret Forbes of the

University of Saskatchewan)

This case is a little longer than the first two, and it involves a share exchange between two

companies. The student has to adopt the role of an accounting advisor to the board of

directors, and prepare a report explaining the accounting required for the share acquisition and

the amounts that will appear in the balance sheet for certain assets.


Case 4

The owners of two small airlines servicing northern communities are considering combining

into one. The student is asked to evaluate two different proposals and to determine how each

would be accounted for.

Case 5 (Prepared by Peter Secord, Saint Mary’s University)

This is a real life situation involving the business combination of four telecommunication

companies that was accounted for as a pooling of interests. Students are required to justify the

use of pooling, to describe the accounting under this method, to discuss the reasons for its

discontinuance and to explain the mechanics of the accounting using today’s Handbook

requirements.

Problem 1 (30 min.)

Preparation of a consolidated balance sheet on the date of a business combination under the

purchase, pooling of interests, and new entity methods.

Problem 2 (25 min.)

Three companies agree to merge. The preparation of a balance sheet immediately after the

merger is required.

Problem 3 (25 min.)

Journal entries in a purchase of net assets type of business combination where the method of

payment is either cash or a common share issue.

Problem 4 (20 min.)

This problem requires the preparation of a balance sheet immediately after the statutory

amalgamation of two companies.


Problem 5 (25 min.)

Preparation of a balance sheet immediately after a business combination in which one

company issues shares to acquire the net assets of another company.

Problem 6 (25 min.)

Two companies agree to merge whereby one will issue shares to acquire the net assets of the

other. A balance sheet using the purchase and pooling methods is required.

Problem 7 (25 min.)

A journal entry and the preparation of a consolidated balance sheet are required after one

company acquires 100% of the shares of another company by paying cash. The assumption is

changed so that the price does not change but shares are the means of payment rather than

cash.

Problem 8 (25 min.)

Preparation of a balance sheet after a business combination involving the acquisition of net

assets of two companies. The problem also requires the balance sheets of the two companies

after they have sold all of their assets and liabilities.

Problem 9 (30 min.)

Two alternatives are presented under which one company acquires all of the net assets of

another company either by paying cash or by issuing shares. The question requires journal

entries for the combination and a balance sheet after the combination for each alternative.

Problem 10 (30 min.)

Exactly the same facts as Problem 9 except that the shares are acquired instead of net

assets.


CASES

Case 1

1. Before the sale C Ltd. owned 70% of the shares of Z Ltd. Because C Ltd. had control, C

Ltd. would report its investment by consolidating Z Ltd. The 2006 loss recorded by Z Ltd.

would be recognized as a loss from discontinued operations by C Ltd., to the extent it

occurred before the sale. A gain or loss on the sale would also be recognized.

After the sale, C Ltd. owns 30% of Z Ltd., which ordinarily would be considered a

significant influence investment if the remaining shares were widely held. In this case

40,000 shares (40%) are held by W Corporation, and therefore there is a possibility that

C's investment may be considered an available for sale investment to be reported using

the cost method. Under the cost method, the investor records its share of dividends

received from the investee as income. If Z Ltd. paid dividends in 2006, C Ltd. would

record its share received as a credit to the investment account because, due to the 2003

loss, they would be considered paid from earnings prior to 2006, when the ownership

percentage was 70%.

2. W. Corporation owns 40% of Z Ltd., which would not be enough for control given that C

Ltd. owns 30%. Therefore, this 40% would probably qualify as a significant influence

investment reported using the equity method. Forty percent of Z Ltd.'s loss would be

reflected in the income statement of W. Corporation.

3. A Ltd. and B Ltd. would report their investments by the proportionate consolidation

method. This would result in 20% (50% 40%) of Z Ltd.'s 2006 loss being taken up by

each company.


Case 2

Basic outline of the contents of the report

1. The purchase method will have to be used to account for this merger, and one of the companies involved will have to be identified as the acquirer.

2. The shares issued by AB Ltd. will end up in the hands of the shareholders of Atlas Inc. and Beta Corp. The company whose shareholders own the largest number of shares will be identified as the acquirer. If each group holds an identical number of shares, the make up of the board of directors and top management of AB LTD. will have to be examined to see if an acquirer can be examined. Domination by one company would indicate the acquirer. If this examination is inconclusive, an acquirer will have to be determined by other means. The larger company would then be declared the acquirer. All of these problems could be avoided if the number of shares issued to each company were not equal.

3. The assets and liabilities appearing on the balance sheet of AB Ltd., on the date of the merger, will be the result of the combining of the assets and liabilities of Atlas Inc. and Beta Corp.

4. The combination will use the book value of the net assets of acquirer, and the fair value of the net assets of the other company.

5. In a combination where one company (the acquirer) issues shares to acquire the net assets of another company, the acquisition cost is compared with the fair value of the other company’s net assets and the difference is either positive or negative goodwill. The acquisition cost is determined by multiplying the number of shares issued by their value (which would be determined by examining their market price before and after the combination). Direct expenses incurred in the combination (consultant, legal and accounting fees) are included in the acquisition cost.

6. In this case the acquisition cost may be difficult to determine because a new company is being formed to purchase the net assets of the two companies that are part to the merger. If Atlas and Beta are public companies and AB Ltd. is to continue as a public company, the market price of its shares in a period after the merger would have to be used to determine the acquisition cost. If both Atlas and Beta were both private companies, presumably AB Ltd. would also be private, and the acquisition cost would be almost impossible to determine with any degree of reliability.

7. When the acquisition cost cannot be determined, no goodwill can be reported. The number of shares issued to the company identified as the acquirer will be issued at the book value of that company’s net assets. The number of shares issued to the acquiree will be issued at the fair value of that company’s net assets.


Case 3

Manitoba Peat Moss

The purpose of this case is to give students an example of a business combination that prior to

June 30, 2001 might have been accounted for as a pooling of interests. The form of the

combination is that Prairie Greenhouses purchases all of the outstanding common shares of

Manitoba Peat Moss; however the substance of the combination is that PG's original

shareholders have given up 50% of their ownership to MPM's previous owner.

Discussion

Report to: Board of Directors

From: Accounting Advisor

Regarding: Proposed Business Combination of PG and MPM

The Board has proposed that PG issue 100,000 common shares in a two-for-one exchange for

all outstanding shares of MPM. You have asked me to provide some insight into how this

exchange of shares will be reported on PG's financial statements.

This combination will have to be accounted for using the purchase method. In order to do this

an acquirer will have to be identified. Normally this is fairly easy to do. For example, when

shares are purchased for cash in a business combination, the company paying cash is the

acquirer. However, if shares are exchanged we have to examine the holding of the two

shareholder groups to see if an acquirer can be identified in this manner. In this case both

groups will hold exactly 50% of the shares of PG and therefore no clear acquirer is identified.

Our accounting standards say that an acquirer must be identified because the assets of the

acquiree are valued at fair market value. It can be justifiably argued that PG is the acquirer for

the following reasons.

1. Paul Parker the sole shareholder of MPM intends to retire. Therefore although he will

own 50% of PG, he probably will not take an active role in the day to day affaires of the

company.

2. PG seems to be the largest company which often is an indicator of an acquirer.

3. PG is the company that is issuing shares which also is often an indicator of an acquirer.


Because PG is clearly the acquirer the assets of MPM will be combined with those of PG at

their fair market value. This means the land would be reported at $6,000,000 rather than

$1,000,000.

However If MPM was determined to be the acquirer, the land would be reported at $1,000,000.

The consolidated financial statements at the date of the combination would appear as follows:

PG MPM Consolidated

Current assets 870,000 450,000 1,320,000)

Fixed assets 8,210,000 2,050,000 15,260,000)

Investment in MPM 6,000,000 )

15,080,000 2,500,000 16,580,000)

Current liabilities 525,000 200,000 725,000)

Long-term debt 2,325,000 1,300,000 3,625,000)

Common shares 10,000,000 500,000 10,000,000)

Retained earnings 2,230,000 500,000 2,230,000

15,080,000 2,500,000 16,580,000)


Case 4

(a)

Scenario 1 has the following characteristics:

Two companies in the same industry joining together.

They seem to be approximately the same size.

The owners of the two companies will remain as owners of the combined company.

The companies are combining resources and will continue on as before, but with cost

savings from more efficient operations.

Northern will issue shares for all of the shares of Bearcat. Presumably Northern is the

acquirer.

Because they are small private companies, the value of their shares would be difficult to

determine.

Scenario 2 has the following characteristics:

Williams is clearly buying the assets of Bearcat at a negotiated price.

Cash is the means of payment. If Northern is paying the cash then Northern is the

acquirer.

Johnson will cease to be an owner.

(b)

In both scenarios one company will end up operating 27 planes. In both cases the planes

owned by Johnson will be valued at fair value with the possibility of also recording goodwill.

Future profits will probably be higher because of synergies but they may be lower due to

higher depreciation charges on the 15 plane acquired and any goodwill impairment losses. The

shares issued would be recorded at market value. If market values for the shares issued

cannot be determined then they would have to be recorded at the value of the shares

received. If this cannot be determined then they would be issued at the fair value of the 15

planes. In this scenario no goodwill would be reported.


CASE 5

Aliant Inc. - Teaching Note This case outlines the Canadian merger which formed Aliant Inc., effective May 31, 1999. The

business combination of Bruncor Inc. (Bruncor), Island Telecom Inc. (Island), Maritime

Telegraph and Telephone Company, Limited (MTT), and NewTel Enterprises Limited (NEL)

was accounted for in the consolidated financial statements by the pooling of interests method.

This method is no longer permitted in Canadian practice; the recommendations of CICA

Handbook section 1580 (in effect since 1974) were superseded effective July, 2001, by section

1581, which requires that all business combinations be accounted for by the purchase method.

The current CICA Handbook includes no reference to the pooling of interest method, except in

sections superseded during 2001. However, the pooling of interest method remains as an

important conceptual alternative to the purchase method, in those cases where an acquirer

may not be easily identified.

Provisions of the superceded section 1580 include:

Business combinations in which the ownership interests of two or more companies are

joined together through an exchange of voting shares and in which none of the parties

involved can be identified as an acquirer can be considered pooling of interests in the

sense that the shareholders combine their resources to carry on in combination the

previous businesses. . . The pooling of interests method should be used to account for

those rare business combinations in which it is not possible to identify one of the parties

as the acquirer. . . In all business combinations, the circumstances surrounding the

transaction will indicate the method of accounting to be used. The purchase method

and the pooling of interests method are not alternative methods of accounting for the

same business combination nor can the transaction be accounted for in part by one

method and in part by the other.


Answers to the specific questions included with the case follow.

a) Explain how the characteristics of this situation make the pooling of interest method an

appropriate choice in the case of this business combination.

The pooling of interest method is appropriate here for a variety of reasons. First, this is the

rare, exceptional case where no acquirer can be identified, as four companies have joined

together, and none of the four companies is clearly a dominant party (especially under the old

Handbook’s guidelines). The most any one shareholder group (former MTT shareholders)

owns is 39.5% of the combined company; former Bruncor shareholders have 34.9%. It is clear

that none of the four groups can have acquired control over the combined company.

Had this transaction been executed in stages, at each stage a dominant shareholder group

might have been identified, and a sequence of parent-subsidiary relationships established.

However, the transactions were executed simultaneously, and at no point did this acquirer

emerge. It appears clear that the pooling of interest approach was planned from the earliest

stages, in order that the assets and liabilities of the combined companies would not have to be

re-valued as a result of the business combination, as would be required had the purchase

method been employed.

A review of the senior managers and board members, as described in the annual report,

shows that all of the former companies are represented. In addition, nether the CEO nor the

chairman are from MTT whose former shareholders hold the largest proportion of the shares of

the combined entity. This is further evidence that there is no clear acquirer.

b) Explain the mechanics of the pooling of interest method as applied to this business

combination.

The pooling of interest approach is executed through the combination of all the assets and

liabilities of the combining enterprises being joined together at their recorded value on the

books of the combining companies. The shareholders' equity of the combined company should

be the sum of the shareholders' equities of the combining companies. The results of


operations for the period in which the combination occurs and for all prior periods should be

reflected on a combined basis (CICA Handbook section 1580). The 1999 comparative

consolidated retained earnings statement has been prepared by combining the retained

earnings statements of the four companies.

c) Reasons why the standard setters decided to disallow pooling.

Pooling does not reflect the values exchanged in the transaction because the fair value

of the shares issued is ignored.

Pooling information is less complete because the method does not reflect a record at all

for any acquired assets or liabilities that were not previously recorded. The purchase

method would record such assets at fair value.

Pooling results in users of financial statements being unable to properly track the

performance of the investment over the years. Subsequent rate-of-return

measurements are inflated artificially under this method because the numerator

(earnings) is higher and the denominator (assets) is lower.

When two different methods are allowed to account for what is essentially the same

economic event, investors have a difficult time comparing the results of companies that

have used different methods.

While future earnings will be different for many years, future cash flows will be the same

under both methods.

The purchase method is consistent with how the acquisition of individual assets is

recorded, and the method of recording the acquisition of an individual asset is the same

regardless of the nature of the consideration paid (cash or shares).


“True mergers” do not exist and it is possible to identify an acquirer in all, or virtually all,

business combinations.

Pooling is not allowed, or is severely restricted, in most countries in the world.

d) Based on the Handbook changes that occurred July 1, 2001, explain the mechanics of

the accounting that would have to be applied in this business combination.

An acquirer would have to be determined. This would probably be MTT based on

percentage shareholdings.

The cost of the purchase would have to be determined. Aliant was a new company

and so its shares did not previously trade but they would have traded after the

combination. Perhaps the fair value of the assets acquired could be used. (If this

was the case there would be no goodwill.)

The cost of the purchase would have to be allocated to the identifiable net assets

acquired including any that were not previously recognized. The allocation would be

based on fair values.

If the acquisition price was greater than the amounts allocated, the amount of the

excess would be recognized as goodwill.


PROBLEMS

Problem 1

(a) Pooling of interests method

G Company

Balance Sheet

Current assets (40,000 + 10,000) 50,000

Plant assets (60,000 + 20,000) 80,000

130,000

Current liabilities (20,000 + 5,000) 25,000

Long-term debt (15,000 + 2,500) 17,500

Common stock (30,000 + 10,000)* 40,000

Retained earnings (35,000 + 12,500) 47,500

130,000

(b) New entity method

G Company K Company

Fair value assets 117,500 34,200

Fair value liabilities 39,000 8,200

Net 78,500 26,000

Book value of shareholders' equity 65,000 22,500

Excess 13,500 3,500


G Company

Balance Sheet

Current assets (47,500 + 9,200) 56,700

Plant assets (70,000 + 25,000) 95,000

151,700


Long-term liabilities (19,000 + 3,200) 22,200

Common stock (30,000 + 10,000) 40,000

Contributed surplus (13,500 + 3,500)* 17,000

Retained earnings (35,000 + 12,500) 47,500

151,700

*Note:

Other interpretations of how to treat the excess that arises when fair values are used are

possible.

(c) Purchase method

Purchase price 6,000 shares @ $4.90 29,400

Fair value of net assets of K Company 26,000

Goodwill 3,400

G Company

Balance Sheet

Current assets (40,000 + 9,200) 49,200

Plant assets (60,000 + 25,000) 85,000

Goodwill 3,400

137,600


Long-term debt (15,000 + 3,200) 18,200

Common stock (30,000 + 29,400) 59,400

Retained earnings 35,000

137,600

Problem 2

Company A shareholders hold 50,000 shares

Company L shareholders will hold 27,000 shares

Company M shareholders will hold 25,000 shares

102,000 shares

Company A shareholders own the largest group so Company A is the acquirer.

Company L

Purchase price (27,000 $5) 135,000

Fair value of assets 163,000)

Fair value of liabilities ( 36,000) 127,000

Goodwill 8,000

Company M

Purchase price (25,000 $5) 125,000

Fair value of assets 188,000)

Fair value of liabilities ( 70,000) 118,000

Goodwill 7,000

Total goodwill — Company L 8,000

Company M 7,000

Other costs 20,000

35,000

Company A

Balance Sheet

January 1, 2006

Current assets (99,900 – 28,000 + 65,000 + 68,000) 204,900

Plant and equipment (147,600 + 98,000 + 120,000) 365,600

Goodwill 35,000

605,500

Liabilities (80,000 + 36,000 + 70,000) 186,000

Common stock (102,000 shares)

(75,000 + 135,000 + 125,000 – 8,000) 327,000


605,500

Problem 3

Part A

Purchase price (1,040,000 + 19,500) 1,059,500

Fair value of net assets 949,000

Goodwill 110,500

Davis journal entry

Current assets 507,000

Plant and equipment 1053,000

Patents 78,000

Goodwill 110,500

Current liabilities 273,000

Long-term debt 416,000

Cash 1,059,500

Part B

Davis is clearly the acquirer because its shareholder group holds the largest block of shares.

(a) The goodwill calculation is the same as in Part A

Current assets 507,000

Plant and equipment 1053,000

Patents 78,000

Goodwill 110,500


Long-term debt 416,000

Common stock ( 1040,000 – 6,500) 1033,500

Cash 26,000

(b)

Bagley Corporation

Balance Sheet

August 1, Year 4

Shares of Hall Inc. 1040,000

Common stock 182,000

Retained earnings (520,000 + 338,000*) 858,000

1040,000

* gain on sale (1040,000 – 702,000 = 338,000)

Problem 4

Note:

After Prong issues 50,000 new common shares, Prong's previous shareholders will hold 58%

(70,000/120,000) of the total outstanding share and Horn's previous shareholders will hold

42% (50,000/120,000) of the total outstanding shares. Prong is therefore the acquirer.

Purchase price (50,000 $7) 350,000

Fair value of Horn

Current assets 170,000)

Plant and equipment 280,000)

Other assets 20,000)

Current liabilities (30,000)

Long-term debt (160,000) 280,000

Goodwill 70,000

Pronghorn Corporation

Balance Sheet

September 1, Year 5

Current assets (135,000 + 170,000) 305,000

Plant and equipment (430,000 + 280,000) 710,000

Other assets (41,000 + 20,000) 61,000

Goodwill 70,000

1,146,000


Long-term debt (180,000 + 160,000) 340,000

Common stock* (70,000 + 350,000) 420,000


1,146,000

* 120,000 shares outstanding.

Problem 5

Purchase price:

82,500 shares @ $20 1,650,000

Other costs 38,500

1,688,500

Fair value of Hanson assets (as listed) 1,531,200

Unrecorded customer service contracts 150,000

1,681,200

Fair value of Hanson liabilities 267,300 1,413,900

Goodwill 274,600

Drake Enterprises

Balance Sheet

January 2, 2006

Cash (99,000 – 82,500 + 55,000) 71,500

Accounts receivable (143,000 + 280,500) 423,500

Inventory (191,400 + 178,200) 369,600

Land (132,000 + 126,500) 258,500

Plant and equipment (660,000 + 891,000) 1,551,000

Customer service contracts

150,000

Goodwill 274,600

3,098,700


Liability for warranties 129,800

Bonds payable 352,000

Common stock (220,000 + 1,650,000 – 44,000) 1,826,000


3,098,700

Problem 6

Part A

(a) Purchase method

Purchase price (300,000 $7.80) 2,340,000

Fair value of net assets 2,290,000

Goodwill 50,000

D Ltd.

Balance Sheet

July 1, Year 5

Current assets (450,000 + 510,000) 960,000

Fixed assets (4,950,000 + 3,500,000) 8,450,000

Goodwill 50,000

9,460,000

Current liabilities (600,000 + 800,000) $1,400,000

Long-term debt (1,100,000 + 920,000) 2,020,000

Common stock (2,500,000 + 2,340,000) 4,840,000

Retained earnings 1,200,000

$9,460,000

(b) Pooling of interests method

D Ltd.

Balance Sheet

July 1, Year 5

Current assets (450,000 + 500,000) 950,000

Fixed assets (4,950,000 + 3,200,000) 8,150,000

9,100,000

Current liabilities (600,000 + 800,000) 1,400,000

Long-term debt (1,100,000 + 900,000) 2,000,000

Common stock (2,500,000 + 500,000) 3,000,000

Retained earnings (1,200,000 + 1,500,000) 2,700,000

9,100,000

Problem 7

Part A

(a)

Investment in Sax 978,000

Cash 978,000

(b)

Purchase price: 978,000

Fair value of assets $1,512,000

Fair value of liabilities 636,000 876,000

Goodwill 102,000

Red Corp

Consolidated Balance Sheet

August 1, Year 3

Current assets (600 – 978 + 468) 90,000

Plant and equipment (1080 + 972) 2,052,000

Patents (0 + 72) 72,000

Goodwill 102,000

2,316,000

Current liabilities (360 + 252) 612,000

Long-term debt (480 + 384) 864,000



2,316,000

Part B

(a)

Investment in Sax 978,000

Common stock (960,000 – 6,000) 954,000

Cash 24,000

(b)

Goodwill Calculation is the same as Part A

Red Corp.


August 1, Year 3

(b)

Current assets (600 + 468 – 24) 1,044,000

Plant and equipment (1,080 + 972) 2,052,000

Patents 72,000

Goodwill 102,000

3,270,000

Current liabilities (360 + 252) 612,000

Long-term debt (480 + 384) 864,000

Common stock (720 + 960 – 6) 1,674,000


3,270,000

Part C

The price paid for the future earnings that the net assets of Sax will generate is the same, so

one could argue that future earnings should be the same. The combined assets (cash) are

higher under part B so it is possible that this additional cash will generate additional profits.

Problem 8

(a)

Company X is clearly the acquirer of Company Y and Company Z.

Company Y

Purchase price (13,500 $14) 189,000


Goodwill 19,000

Company Z

Purchase price (12,000 $14) 168,000


Goodwill 65,000

Total goodwill

Company Y above 19,000

Company Z above 65,000

Expenses of combination 30,000

114,000

Company X

Pro Forma Balance Sheet

January 2, Year 4

Assets (400 – 42 + 350 + 265) 973,000

Goodwill 114,000

1,087,000

Liabilities (232.5 + 180 + 162) 574,500

Common stock (75 – 12 + 189 + 168) 420,000


1,087,000

(c) Pro forma balance sheets

January 2, Year 4

Company Y Company Z

Investment in shares of Company X 189,000 168,000

Common stock 48,000 60,000

Retained earnings (see below) 141,000 108,000

189,000 168,000

Retained earnings before sale 70,000 35,000

Gain on sale of net assets 71,000 73,000

141,000 108,000

(Company Y: $189,000 – $118,000 = $71,000)

(Company Z: $168,000 – $95,000 = $73,000)

Problem 9

Proposal 1

Purchase price (300,000 + 5,000) 305,000


Goodwill 8,230

(a)

Cash 300,000

Loan payable 300,000

Cash 52,500

Accounts receivable 56,200

Inventory 134,220

Land 210,000

Buildings 24,020

Equipment 15,945

Goodwill 8,230

Current liabilities (detail) 41,115

Noncurrent liabilities (detail) 155,000

Cash 305,000

Myers Company

Balance Sheet

Cash (140,000 + 300,000 – 305,000 + 52,500) 187,500


Inventory (374,120 + 134,220) 508,340

Land (425,000 + 210,000) 635,000

Buildings (net) (250,505 + 24,020) 274,525

Equipment (net) (78,945 + 15,945) 94,890

Goodwill 8,230

1,931,885


Noncurrent liabilities (300,000 + 155,000) 455,000



1,931,885

Proposal 2

Myers is the acquirer because its shareholders hold 52,000 shares while Norris shareholders

will hold 50,000 shares.

Purchase price 50,000 @ $8 400,000

Legal fees 5,000

405,000

Fair value of net assets

296,770

Goodwill 108,230

(a) Cash (52,500 – 12,000) 40,500

Accounts receivable 56,200

Inventory 134,220

Land 210,000

Buildings 24,020

Equipment 15,945

Goodwill 108,230


Noncurrent liabilities 155,000

Common stock (400,000 – 7,000) 393,000

(b) Myers Company

Balance Sheet

Cash (140,000 + 40,500 ) 180,500


Inventory (374,120 + 134,220) 508,340

Land (425,000 + 210,000) 635,000

Building (net) (250,505 + 24,020) 274,525

Equipment (net) (78,945 + 15,945) 94,890

Goodwill 108,230

2,024,885



Common stock (500,000 + 400,000 – 7,000) 893,000


2,024,885

Problem 10

Proposal 1

(a)

Cash 300,000

Loan payable 300,000

Investment in Norris Inc. 305,000

Cash 305,000

Purchase price (300,000 + 5,000) 305,000


Goodwill 8,230

(b) Myers Company


Cash (140,000 + 300,000 – 305,000 + 52,500) 187,500


Inventory (374,120 + 134,220) 508,340

Land (425,000 + 210,000) 635,000

Buildings (net) (250,505 + 24,020) 274,525

Equipment (net) (78,945 + 15,945) 94,890

Goodwill 8,230

1,931,885


Noncurrent liabilities (300,000 + 155,000) 455,000



1,931,885

Proposal 2

(a)

Investment in Norris Inc. 400,000


Common stock 7,000

Investment in Norris 5,000

Cash

12,000

Purchase price 50,000 @ $8 400,000

Legal fees 5,000

405,000

Fair value of net assets

296,770

Goodwill 108,230

(b) Myers Company


Cash (140,000 – 12,000 + 52,500) 180,500


Inventory (374,120 + 134,220) 508,340

Land (425,000 + 210,000) 635,000

Building (net) (250,505 + 24,020) 274,525

Equipment (net) (78,945 + 15,945) 94,890

Goodwill 108,230

2,024,885



Common stock (500,000 – 7,000 + 400,000 ) 893,000


2,024,885

hilton4e_sm03

Documents

acquired company

combined company

acquiring company

larger company

purchase of net assets

acquirers net

individual identifiable

voting shares