Assume that the following balance sheets are stated at book

Assume that the following balance sheets are stated at book value.

Suppose the fair market value of Loaf’s fixed assets is $15,900 versus the $10,800 book value shown. Meat pays $22,600 for Loaf and raises the needed funds through an issue of long-term debt. Construct the postmerger balance sheet, assuming that the purchase method of accounting is used.

Hints

Assume that the following balance sheets are stated at book value.

Solution

Meat Co Current assets $14,200 Current liabilities 6400 Net fixed assets 39300 Long-term debt 10900 Equity 36200 $53,500 $53,500 Meat Co, post merger Current assets Current liabilities Net fixed assets Long-term debt Goodwill Equity $0 $0 Here, Goodwill would arise since the purchase price paid is more than the value of the assets Purchase Price 22600 Less: Current assets -4500 market value of Fixed assets -15900 Add: Current liabilities 2400 Long term debt 3000 Goodwill 7600 Current assets of merger firm would be sum of pre merger amount of Loaf and Meat Current assets 14200+4500 18700 Net Fixed assets 39300+15900 55200 Current Liabilities 6400+2400 8800 Long Term Debt 10900+3000 13900 Add: Long term debt taken 22600 Equity would remain the same as of pre merger of Meat Meat Co, post merger Current assets $18,700 Current liabilities 8800 Net fixed assets 55200 Long-term debt 36500 Goodwill 7600 Equity 36200 $81,500 $81,500