2 METHODS OF ACCOUNTING FOR BUSINESS COMBINATION (A letter A after a question, exercise, or problem means that the question, exercise

, or problem relates to the chapter appendix). Questions

1. Discuss the basic differences between the purchase method and the pooling of interests method. Include the impact on financial ratios.

2. When a contingency is based on security prices and additional stock is issued, how should the additional stock issued be accounted for? Why?

3. What are pro forma financial statements? What is their purpose?

4. How would a company determine whether goodwill has been impaired?

5. Describe the potential differences between accounting for a merger using the purchase rules as prescribed by FASB in Statements No. 141 and 142, the former purchase rules (with goodwill amortization) and the pooling of interests method. Assume that the cost of the acquisition exceeds the fair value of the identifiable net assets of the acquired firm and that the fair value of the identifiable net assets exceeds their precombination book value.

6. AOL announced that because of a new accounting change ( FASB Statements No. 141 and 142), earnings would be increasing over the next twenty-five years by $5.9 billion a year. What change(s) required by FASB (in SFAS No. 141 and 142) resulted in an increase in AOL’s income? Would you expect this increase in earnings to have a positive impact on AOL’s stock price? Why or why not?

Exercises

Exercise 2-1 Asset Purchase

Preston Company acquired the assets (except for cash) and assumed the liabilities of Saville Company. Immediately prior to the acquisition, Saville Company's balance sheet was as follows:

Cash Receivables (net) Inventory Plant and equipment (net) Land Total assets Liabilities Common stock ($5 par value) Other contributed capital Retained earnings Total equities

Book Value $ 120,000 192,000 360,000 480,000 420,000 $1,572,000 $ 540,000 480,000 132,000 420,000 $1,572,000

Fair Value $ 120,000 228,000 396,000 540,000 660,000 $1,944,000 $ 594,000

Required: A. Prepare the journal entries on the books of Preston Company to record the purchase of the assets and assumption of the liabilities of Saville Company if the amount paid was $1,560,000 in cash. B. Repeat the requirement in (A) assuming the amount paid was $990,000.

Exercise 2-2 Purchase Method

The balance sheets of Petrello Company and Sanchez Company as of January 1, 2004, are presented below. On that date, after an extended period of negotiation, the two companies agreed to merge. To effect the merger, Petrello Company is to exchange its unissued common stock for all the outstanding shares of Sanchez Company in the ratio of ½ share of Petrello for each share of Sanchez. Market values of the shares were agreed on as Petrello, $48; Sanchez, $24. The fair values of Sanchez Company's assets and liabilities are equal to their book values with the exception of plant and equipment, which has an estimated fair value of $720,000.

Cash Receivables Inventories

Petrello $ 480,000 480,000 2,000,000

Sanchez $ 200,000 240,000 240,000

On the acquisition date.000 $ 320.000 $1.000 400.800.Plant and equipment (net) Total assets Liabilities Common stock.000 800.480. As compensation.800.480. 15.000 $1. and cash of $50. $16 par value Other contributed capital Retained earnings Total equities 3.440.000 3. Cash and Stock Pretzel Company acquired the assets (except for cash) and assumed the liabilities of Salt Company on January 2.000 to the stockholders of Salt Company.000 $6. Exercise 2-3 Asset Purchase.000 shares of its 10% preferred stock.000 1.000 Required: Prepare a balance sheet for Petrello Company immediately after the merger.840.000 $1.000 $6. Pretzel Company stock had the following characteristics: Pretzel Company Stock Common Preferred Par Value $ 10 100 Fair Value $ 25 100 . Pretzel Company gave 30.200.000 800.760.000 --0-360.000 shares of its common stock. 2005.

$5 par value Other contributed capital Retained earnings Total liabilities and stockholders' equity Required: Book Value $ 165.000 Prepare the journal entry on the books of Pretzel Company to record the acquisition of the assets and assumption of the liabilities of Salt Company.000 495.000 220.000 330.000 $ 2.Immediately prior to the acquisition.000 198.387. Exercise 2-4 Asset Purchase.144.000 $ 275.000 550.000 Fair Value $ 165.000 1.000 396.LIFO cost Land Buildings and equipment (net) Total assets Current liabilities Bonds Payable.000 1. Salt Company's balance sheet reported the following book values and fair values: SALT COMPANY Balance Sheet January 2.000 219.000 450.000 allowance) Inventory .110.000 396.000 770.000 $ 2.144.000 $ 275.000 275. Cash .000 $ 2. 10% Common stock.200. 2005 Cash Accounts receivable (net of $11.

2003. 2. .800 $ 897.000 120.400 169.000.000. Inventory has a fair value of $126.000 55.200 110. The current yield rate on bonds of similar risk is 8%. $2 par value Retained earnings Total $ 96. 3.600 $ 44. Par Common stock. Land has a fair value of $198.000 253.600 Fair values of S Company's assets and liabilities were equal to their book values except for the following: 1.400 480. 2003 Cash Receivables Inventory Land Plant and equipment (net) Total Accounts payable Bonds payable.200 466. 10%.200 $ 897.000 when S Company's balance sheet was as follows: S COMPANY Balance Sheet January 1. due 12/31/2008. for $510. The bonds pay interest semiannually on June 30 and December 31.P Company acquired the assets and assumed the liabilities of S Company on January 1.

000 480.400.000 or more per year over the next two years.440.000 Fair value $ 960.000 1. for $2.000 $ 2.000 $ 2.000 $ 2. 2003. Pritano agreed to pay the stockholders of Succo $360.000 600.000 1.000 $ 216.040.040.000 780.000 $ 180. Earnings Contingency Pritano Company acquired all the net assets of Succo Company on December 31.080.000 cash if the postcombination earnings of Pritano averaged $2. The balance sheet of Succo Company immediately prior to the acquisition showed: Current assets Plant and equipment Total Liabilities Common stock Other contributed capital Retained earnings Total Book value $ 960.160.000 cash.160.Required: Prepare the journal entry on P Company's books to record the acquisition of the assets and assumption of the liabilities of S Company.000 As part of the negotiations. Exercise 2-5 Asset Purchase. Required: .

B. During negotiations Platz Company agreed that their common stock would have at least its current value of $50 per share on January 1. 2004. B. assuming: A. The contingency is settled in cash. The contingency is settled by issuing additional shares of stock. was $40 per share. 2004. 2003. prepare the journal entry on Pritano's books needed to settle the contingency on December 31. Platz Company acquired all the net assets of Satz Company by issuing 75.A. Prepare the journal entries on the books of Pritano to record the acquisition on December 31.000 shares of its $10 par value common stock to the stockholders of Satz Company. Required: Prepare the journal entry on Platz Company's books on January 1. Exercise 2-6 Asset Purchase. 2003. Assuming the earnings contingency is met. 2004. Stock Contingency On January 1. The market price of Platz Company's common stock on January 1. 2005. .

000 $15.000 Fair value $ 3.000 $28.500 outstanding shares of Bayco.000 12.000 outstanding common shares. Bayco is then merged into Draco. and Draco then borrows $50.000 Complete the following schedule showing the values to be reported in Draco's balance sheet immediately after the leveraged buyout. Current assets Plant assets Goodwill Debt Stockholders' equity Exercise 2-8 Multiple Choice $ .000 to purchase the remaining 9. Draco is formed by the managers of Bayco to take over Bayco in a leveraged buyout. The managers contribute their shares in Bayco.000 25. Data relevant to Bayco immediately prior to the leveraged buyout follow: Book Current assets Plant assets Stockholders' equity Required: value $ 3.Exercise 2-7 Leveraged Buy-out Managers of Bayco own 500 of its 10.

000 550. $20 par value Other contributed capital Retained earnings Total Price $ 438. Balance sheets for Price Company and Sims Company immediately prior to the combination were: Current assets Plant and equipment (net) Total Liabilities Common stock.000 136.000 20.000 $200.000 50.500 90.000 Required: Select the letter of the best answer.000 72.000 $ 300.013.000 $ 50.000 Sims $ 64.500 $1.000 shares of its $20 par value common stock for the net assets of Sims Company in a business combination under which Sims Company will be merged into Price Company.800. Price Company's balance sheet immediately after the combination will include goodwill of . 1.Price Company issued 8.000 $1.013.000 575.000 $200. On the date of the combination. Price Company common stock had a fair value of $30 per share. If the business combination is treated as a purchase and Sims Company's net assets have a fair value of $228.000 80.

Balance sheets of each of the corporations immediately prior to merger on December 31.000. and its liabilities are $56. (d) $18.000. Zintel Corporation proposes to issue additional shares of its common stock in exchange for all the assets and liabilities of Smith Corporation and Platz Corporation. If the business combination is treated as a purchase and the fair value of Sims Company's current assets is $90.800. its plant and equipment is $242.(a) $10. The common stock exchange ratio was negotiated to be 1:1 for both Smith and Platz. Price Company's balance sheet immediately after the combination will include (a) Negative goodwill of $36.200.800. after which Smith and Platz will distribute the Zintel stock to their stockholders in complete liquidation and dissolution. 2003. Exercise 2-9 Purchase Effective December 31. 2003. (d) Goodwill of $36.000. (b) $12. follow.000. 2. (c) Plant and equipment of $781.000. (b) Plant and equipment of $817. . (c) $11.000.200.000.

000 1.000.000 5.000 700. $5 par value Retained earnings Total Required: Zintel $1.000 1.000 61.000 $7.000 and the fair value of Platz’s long-term assets exceed their book values by $5.700. Assume the following: The identifiable assets and liabilities of Smith and Platz are all reflected in the balance sheets (above).000. and their recorded amounts are equal to their current fair values except for long-term assets.000 $ 9.240.000 Smith $ 350.000. Prepare journal entries on Zintel's books to record the combination.000 2.000 $ 700.300.100.500.000 $7.000 20.000 430.600.000 Prepare journal entries on Zintel's books to record the combination.000 $110.Current assets Long-term assets (net) Total Current liabilities Long-term debt Common stock.000 3.240.000 $110.000 98.000 $2.000 $ 110.000 20.000 $2.000 Platz $ 12. The fair value of Smith’s long-term assets exceed their book value by $20. (AICPA adapted) .000 1.890. Zintel's common stock is traded actively and has a current market price of $15 per share.300.

000 80.Exercise 2-10 Allocation of Purchase Price to Various Assets and Liabilities Company S has no long-term marketable securities.000 Liabilities $20.000 Case B Assume that P Company paid $110. S Company Assets Current Assets Book Value Fair Value $15.000 120.000 20.000 cash for 100% of the net assets of S Company.000 Long-lived Assets $85.000 cash for 100% of the net assets of S Company.000 30.000 Net Assets $80.000 Case C Assume that P Company paid $15.000 cash for 100% of the net assets of S Company.000 30.000 Long-lived Assets $85.000 130.000 Liabilities $20.000 90.000 Net Assets $80. Assume the following scenarios: Case A Assume that P Company paid $130.000 20. S Company Assets Current Assets Book Value Fair Value $15. .

000 40.000 20.000 on this date.000 Liabilities $20.000 cash.000 20. The fair value of Saab’s identifiable net assets was $375. 2003.000 Required: Complete the following schedule by listing the amount that would be recorded on P’s books.000 Net Assets $80. Porsche Company acquired the net assets of Saab Company for $450. Goodwill Case A Assets Current Assets Liabilities Long-lived Assets Case B Case C Exercise 2-11 Goodwill Impairment Test On January 1.000 40.000 Long-lived Assets $85.S Company Assets Current Assets Book Value Fair Value $15. Porsche Company decided to measure goodwill impairment using the present value of future cash flows to .

The information for these subsequent years is as follows: Carrying Value of Present value Identifiable Year Net Assets of Future Cash Flows Saab’s Identifiable Fair Value Saab’s 2004 2005 2006 $400.000 $340.000 *Identifiable net assets do not include goodwill. if any.000 $350. Required: Part A: For each year determine the amount of goodwill impairment.000 $320.000 $300.000 325.000 $330.estimate the fair value of the reporting unit (Saab). Part B: Prepare the journal entries needed each year to record the goodwill impairment (if any) on Porsche’s books from 2004 to 2006: Part C: How should goodwill (and its impairment) be presented on the balance sheet and the income statement in each year? .000 $400.000 345.

000 880.000 250. the assets.000 330. the only item on Stairs’ balance sheet not recorded at fair value was plant assets.000 $1. Plant assets had a 10 year remaining life and goodwill was to be amortized over 20 years. On the date of the combination (immediately before the acquisition).000 $505.280.000 380.000. what additional information needs to be disclosed? Exercise 2-12 Accounting for the Transition in Goodwill Treatment Porch Company acquired the net assets of Stairs Company on January 1. . The management of Porch recently adopted a vertical merger strategy.000 Stairs $125.000.000 $ 505.000 $100.000 $ 300.280. $20 par value Other contributed capital Retained earnings Total Porch $ 400. liabilities.000 On the date of acquisition.000 400.000 200.000 $ 1. 2000 for $600.000 75.Part D: If goodwill is impaired. and stockholders’ equity of each company were as follows: Current assets Plant assets (net) Total Total Liabilities Common stock.000 130. which had a fair value of $400.

how should it be shown in the financial statements for the year 2002? . Stairs is considered to be a reporting unit for purposes of goodwill impairment testing. Its fair value was estimated to be $550. 3. If there is an impairment of goodwill. the FASB issued SFAS No. 2. 2002? Hint: Recall that although goodwill is no longer amortized under current GAAP. the fair value of Stairs’ identifiable net assets was $450. Prepare the journal entry as of January 1. perform the impairment test and calculate the loss from impairment. 141 and 142 and the Porch Company adopted the new statements as of January 2002. and its carrying value (including goodwill) on that date was $600. Required: 1. 2002. if any. it was amortized for most companies in the years 2000 and 2001.000. A transitional goodwill impairment test is required on the date of adoption of the new FASB standards (to be carried out within the first six months after adoption) for preexisting goodwill.000 on January 1. On January 1. What is the carrying value of goodwill (unamortized balance) resulting from the acquisition of Stairs as of January 1. to record the acquisition of Stairs by Porch. 2002.In 2001. 2000. Based on the facts listed above.000.

What transitional disclosures are required in the year of initial adoption of SFAS No.4. 141 and 142? .

000 100. b.000 $ 1. The purchase price below which Peach would record an extraordinary gain.000 880. 2004.280. determine the following cutoff amounts: a. The purchase price below which the equipment would be recorded at less than its fair market value.000 $500.000 $ 500.000 $100. $20 par value Other contributed capital Retained earnings Total Peach $ 100. The purchase price above which Peach would record goodwill.000 200. Assuming that Peach Company wishes to acquire Stream for cash in an asset acquisition. and Negative Goodwill The following balance sheets were reported on January 1.000 300.000 Stream $ 20. The book value and fair value of liabilities are the same.000 $1.000 $ 300.000 330.280.000 400. .000 70.000.000 250. for Peach Company and Stream Company Cash Inventory Equipment (net) Total Total Liabilities Common stock. Goodwill.000 130.000.Exercise 2-13 Relation between Purchase Price.000 380.000 Required: Appraisals reveal that the inventory has a fair value of $120. and the equipment has a current value of $410. c.

000 15. however. Exercise 2-14 Comparison of Earnings Effects of Purchase (Old and New Rules) versus Pooling of Interests The Arthur Company is considering a merger with the Guinevere Corporation as of January 1.d. that the deal will be structured so as to qualify as a nontaxable exchange for tax purposes.000 15. If the deal goes through.000 $250.000 of goodwill.000 . 2000.000 $ 225. Guinevere Book Values Current assets: Cash Accounts receivable Inventory Property. the Arthur Company expects to issue 20.000 60.25 per share. It has not been determined whether the transaction will meet the criteria for a pooling of interests.000 shares of its $5 par stock. the stock is currently trading at $22.000 30.000 $100.000 Guinevere Market Values $20. The purchase price below which Peach would obtain a “bargain. 2000.000 120.000 30. plant & equipment: Building (net) Equipment (net) Total assets $20.” e. It has been determined. Also shown are Arthur’s assessments of Guinevere’s market values at January 1. The purchase price at which Peach would record $50. The balance sheet of the Guinevere Corporation at the acquisition date is projected to appear as shown below.

$10 par value Retained earnings Total liabilities and equities $ 30.000 $ 30.000 Because Arthur Company’s management is worried about the relative effects of purchase and pooling on future income statements. they have asked you to compare income before taxes for the year 2000 under purchase versus pooling of interests accounting. the purchase method—new rules. Assume that any goodwill was to be amortized over a 40 year period under old purchase rules (not at all under new purchase rules). and straight-line depreciation and amortization are used.Total liabilities Common stock. Exercise 2-15A Acquisition Entry.000 80.000 115.000 for 2000. not including depreciation on Guinevere’s property and equipment or any goodwill amortization related to the acquisition of Guinevere. and the equipment of 10 years. and the pooling of interests method. Assume that the building has a remaining useful life of 20 years.000 $ 225.000. Required: Compare income before taxes for the year 2000 under the purchase method—old rules. Combined revenues for Arthur and Guinevere are estimated at $300. Estimated expenses are $120. Deferred Taxes . Show support for your calculations.

in a statutory merger.000 112.000 180. Problems .000 54.000 55.Patel Company paid $600.000 30.000 $784.000 54.000 134.000 132.000 392. Seely Company had the following assets.000 cash for the net assets of Seely Company on January 1. $1 par value Other contributed capital Retained earnings Total equities Required: Book Value Tax Basis $ 20.000 Fair Value $ 20.000 25. liabilities.000 200.000 112.000 $ 10. Assume an income tax rate of 40%.000 80. and owners' equity at that time: Cash Accounts receivable Inventory (LIFO) Land Plant assets (net) Total assets Allowance for uncollectible accounts Accounts payable Bonds payable Common stock.000 160.000 $636.000 $-0-020.000 $636. 2004.000 $ 10.000 Excess $-0--0-52.000 71.000 82.000 463.000 Prepare the journal entry to record the assets acquired and liabilities assumed.

000 160.000 140.000 (23. 2003. $530.000 $ 95.000 125.000 shares of its $20 par value common stock for the net assets of Phillips and Solina.000 in stock issue costs. Solina.000 60. $150. would be formed to consolidate Phillips and Solina.000) $ 225. The fair value of plant and equipment for each company was: Phillips.000 $ 630. $10 par value Other contributed capital Retained earnings (deficit) Total equities Phillips $180.000 450. the fair values of Phillip's and Solina's current assets and liabilities were equal to their book values. Required: .000 $ 225.000 On January 1.000 $ 35. McGregor Company issued 30.000.000 53. McGregor Company. the stockholders of Phillips and Solina agreed to a consolidation whereby a new corporation.000 of direct acquisition costs and $6. The investment banking house of Bradly and Bradly estimated that the fair value of McGregor Company's common stock was $35 per share. Phillips will incur $20.Problem 2-1 Consolidation Condensed balance sheets for Phillips Company and Solina Company on January 1. On the date of consolidation.000 Solina $ 85.000 350. 2003.000. are as follows: Current assets Plant and equipment (net) Total assets Total liabilities Common stock.000 $ 630.

Balance sheets and the fair values of each company's assets on October 1.200.000 $ 260. Baltic Company.500.000) $ 950.000 $4.000 $9.000.900.000 $1.000.000 $2.000 $7. 2004.Prepare the journal entries to record the consolidation on the books of McGregor Company.030. and Colt Company are considering alternative arrangements for a business combination. Problem 2-2 Merger and Consolidation Stockholders of Acme Company.200.000 540. were as follows: Assets Liabilities Common stock.000 2.000) $3. Assume the following: .500. A fair (market) price is not available for shares of the other companies because they are closely held. Fair values of liabilities equal book values.900.000 --0-(130.000 Baltic $7.900.000 Acme Company shares have a fair value of $50.000 1.000 2.000 190.800. $20 par value Other contributed capital Retained earnings (deficit) Total equities Fair values of assets Acme $3.000 $2. Required: Prepare a balance sheet for the business combination.300.000 (40.000 600.000 Colt $ 950.

968. 2004.250) $ 968. a maturity date of January 1. Balance sheets for Perez and Stalton (as well as fair value data) on January 1.000 232.300 700. and a yield rate of 12%.000 (325. In exchange for the net assets of Stalton.000 950. Perez gave its bonds payable with a maturity value of $600.050) $ 2.000 352. were as follows: Cash Receivables Inventories Land Buildings Accumulated depreciation buildings Equipment Accumulated depreciation equipment Total assets Current liabilities Bonds payable.Acme Company acquires all the assets and assumes all the liabilities of Baltic and Colt Companies by issuing in exchange 140.000 100. Interest Perez Book Value $ 250.000 54.750 (70.000 150. 8% due 1/1/2013.000 315.700 (84. interest payable semiannually on June 30 and December 31. Problem 2-3 Purchase of Net Assets Using Bonds On January 1.500 $95.450 (90.000 shares of its common stock to Colt Company.300 300. 2014. 2004.500) 136. Perez Company acquired all the assets and assumed all the liabilities of Stalton Company and merged Stalton into Perez.350 $95.900 123.300 260.700 Stalton Book Value $114.700 848.000 Fair Value $114.000 410.000.700 $ 292. a stated interest rate of 10%.000 shares of its common stock to Baltic Company and 40.000 .000 310.000) 262.450) $ 881.000 135.000 (170.

2003. $15 par value Common stock.000 153.000 Fair Value $ 65.000 $ 874. Problem 2-4 Cash Acquisition.200.000 $ 83.064.000 cash.000 369.000 $ 83.500 Required: Prepare the journal entry on the books of Perez Company to record the acquisition of Stalton Company's assets and liabilities in exchange for the bonds.700 $ 881. Senn Company's December 31.000 $ 1.000 229. 2004.000 $ 2.000 526. showed: Accounts receivable (net) Inventory Land Buildings (net) Equipment (net) Total Accounts payable Note payable Common stock. $2 par value Other contributed capital Retained earnings Book Value $ 72.000 229.000 950.000 99.000 79.000 . Earnings Contingency Pham Company acquired the assets (except for cash) and assumed the liabilities of Senn Company on January 1.968. paying $720.700 236.000 162.000 237.000 110.payable 6/30 and 12/31 Common stock.000 86.500 170.000 288.000 180. balance sheet. reflecting both book values and fair values. $5 par value Other contributed capital Retained earnings Total equities 1.000 180.000 450.

000 cash if the postcombination earnings of the combined company (Pham) reached certain levels during 2004 and 2005. prepare the journal entry on Pham Company's books to settle the contingency on January 2.000 shares of Park Company for $80. Park Company is then merged into Step .000.000 to purchase the remaining 19. C. Repeat requirement (B) assuming the amount of the contingent payment was $80. Problem 2-5 Leveraged Buyout The managers of Park Company own 1.000 As part of the negotiations.000 rather than $135. Record the journal entry on the books of Pham Company to record the acquisition on January 1.Total $ 874. Assuming the earnings contingency is met. 2006. The managers contribute their shares in Park Company and Step Company then borrows $90. Step Company is formed by the managers of Park Company to take over Park Company in a leveraged buyout. the remaining $10. B. Pham Company agreed to pay the former stockholders of Senn Company $135.000.000 of its 20.000 outstanding common shares. Required: A. 2004.000 is used for working capital.

000 35.000 230.000) $75.900 $ 255.500 $ 1.400 1.877.000 (7.000 117.000 900.000 Pepper $180.000 231.000 Required: A.000 $ 180.500 340. 2003.000 $ 1.236. Prepare a balance sheet for Step Company immediately after the merger. $20 par value $95.000) $40. Problem 2-6 Asset Acquisition.000 Fair Value $12. Data relevant to Park Company immediately prior to the leveraged buyout follow: Current assets Plant assets Liabilities Stockholders' equity Book Value $12.036.000 690.000 (7.000 152.000 .900 180. 2003. follow: Salt ASSETS Cash Receivables Inventories Plant assets Total assets EQUITIES Accounts payable Mortgage payable Common stock. Prepare journal entries on Step Company's books to reflect the effects of the leveraged buyout.000 70. B. Proforma Balance sheets for Salt Company and Pepper Company on December 31.000 134.Company effective January 1.

900 Pepper Company tentatively plans to issue 30.800.036. which has a current market value of $37 per share net of commissions and other issue costs.000 representing payment for goodwill. Problem 2-7 Purchase.000 $ 1.500 184.000 owed by Salt Company. Pepper Company is willing to pay more than the book value of Salt Company assets because plant assets are undervalued by $215.000 272.000 and Salt Company has historically earned above-normal profits.000 270.877.Other contributed capital Retained earnings Total equities 179. Required: Prepare a pro forma balance sheet showing the effects of these planned transactions. Operating data for 2003 for the two companies are as follows: Ping Spalding .000 $ 1.000 and $300. Decision to Accept Spalding Company has offered to sell to Ping Company its assets at their book values plus $1.000 shares of its $20 par value stock.000 in long-term 8% notes payable. Pepper Company then plans to acquire the assets and assume the liabilities of Salt Company for a cash payment of $800. Pepper Company's receivables include $60.

500 172.800 942. which is 70% of cost of goods sold. is expected to increase in proportion to the increase in sales volume.752.757.100 1.365.000 442.Sales Cost of goods sold Gross profit Selling expenses Other expenses Total expenses Net income Company $3. the sales volume of Ping Company will be 20% in excess of the present combined sales volume.423. Fixed manufacturing expenses have been 35% of cost of goods sold for each company.800 1. After the merger the fixed manufacturing expenses of Ping Company will be increased by 70% of the current fixed manufacturing expenses of Spalding Company.740 $632. Selling expenses of Ping Company are expected to be 85% of the present combined selling expenses of the two companies.510.600 805.100 $ 499. D. B.100 150. C.360 1. The current variable manufacturing expenses of Ping Company. and the sale price per unit will be decreased by 10%.640 Company $2.000 $292. After the merger. .900 Ping Company's management estimates the following operating changes if Spalding Company is merged with Ping Company through a purchase: A.100 $ 952. Other expenses of Ping Company are expected to increase by 85% as a result of the merger.

000 Excess $--0-28.500 100.000 .500 360.500 $ 89.000 567.000 shares of its $2 par value common stock for the net assets of Shah Company in a statutory merger accounted for as a purchase.000 86.000 120.000 105.500 300. and indicate whether Ping Company should accept the offer.000 195.000 $1.000 $266. Ping Company will accept the offer. A schedule of the Shah Company assets acquired and liabilities assumed at book values (which are equal to their tax bases) and fair values follows.000 $940.500 467.Any excess of the estimated net income of the merged company over the combined present net income of the two companies is to be capitalized at 20%.000 33.500 $--0-60.207. Pruitt's common stock had a fair value of $28 per share at that time.000 95.000 200. Required: Prepare a pro forma (or projected) income statement for Ping Company for 2004 assuming the merger takes place.000 167. Item Receivables (net) Inventory Land Plant assets (net) Patents Total Current liabilities Bonds payable Book Value/ Tax Basis $125.000 $ 89.000 Fair Value $ 125. Pruitt Company issued 30. Problem 2-8A Acquisition Entry and Deferred Taxes On January 1. 2005. If this amount exceeds the price set by Spalding Company for goodwill.

000 in 2005. Shah's beginning inventory was all sold during 2005. 120. Assuming Pruitt Company had taxable income of $468. 3. Prepare the entry on Pruitt Company's books to record the acquisition of the assets and assumption of the liabilities of Shah Company. Pruitt's income tax rate is 35%.Common stock Other contributed capital Retained earnings Total Additional Information: 1.000 164.000 267.000 2. . prepare the income tax entry for 2005. B. Required: A.000 $940. Pruitt uses the straight-line method for all depreciation and amortization purposes. Useful lives for depreciation and amortization purposes are: Plant assets Patents Bond premium 10 years 8 years 10 years 4.

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