Question

Consider the following premerger information about Firm X and Firm Y:

  Total earnings   Shares outstanding   Per-share values: Market    book

Firm X $ 96,000    53,000    53 14

Firm Y $ 22,500    18,000    18 8

Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $5 per share, and that neither firm has any debt before or after the merger. Construct the postmerger balance sheet for Firm X assuming the use of the purchase accounting method. (Do not round intermediate calculations.)

Assets from X $

Assets from Y

Goodwill

Total Assets XY $

Answer 1

	Under purchase accounting, method
	Record assets of acquiring company (X) at book value
	Record assets of target company (Y) at market value
	Post-merger balance sheet:
					$
	Assets from X		(53000*14)		742000
	Assets from Y		(18000*18)		324000
	Goodwill		(Note:1)		90000
	Total Assets XY				1156000
	Note:1- Goodwill
							$
	Purchase consideration			18000*(18+5)			414000
	(market value+merger premium)* shares outstanding)
	Less:assets from Y						324000
	Goodwill						90000