Question

Pumpworks Inc. and Seaworthy Rope Company agreed to merge on January 1, 20X3. On the date of the merger agreement, the companies reported the following data:
  

	Pumpworks								Seaworthy Rope Company
Balance Sheet Items	Book Value				Fair Value				Book Value				Fair Value
Assets
Cash & Receivables	$	90,000			$	90,000			$	20,000			$	20,000
Inventory		100,000				150,000				30,000				42,000
Land		100,000				140,000				10,000				15,000
Plant & Equipment		400,000				300,000				200,000				140,000
Less: Accumulated Depreciation		(150,000	)							(80,000	)
Total Assets	$	540,000			$	680,000			$	180,000			$	217,000
Liabilities & Equities
Current Liabilities	$	80,000			$	80,000			$	20,000			$	20,000
Capital Stock		200,000								20,000
Capital in Excess of Par Value		20,000								5,000
Retained Earnings		240,000								135,000
Total Liabilities & Equities	$	540,000							$	180,000

Pumpworks has 10,000 shares of its $20 par value shares outstanding on January 1, 20X3, and Seaworthy has 4,000 shares of $5 par value stock outstanding. The market values of the shares are $300 and $50, respectively.

a. Pumpworks issues 700 shares of stock in exchange for all of Seaworthy’s net assets. Prepare a balance sheet for the combined entity immediately following the merger.

b. Prepare the stockholders' equity section of the combined company's balance sheet, assuming Pumpworks acquires all of Seaworthy's net assets by issuing:

1. 1,100 shares of common.
2. 1,800 shares of common.
3. 3,000 shares of common.

Answer 1

Prepare the combined balance sheet
Pump works Inc. and Seaworthy Rope Company
January 1, 20X3
Assets	Amount ($)	Liabilities	Amount ($)
Cash and receivables	110000	Current liabilities	100000
Inventory	142000	Capital stock	214000
Land	115000	Capital in excess of par value	216000
Plant and equipment	540000	retained earnings	240000
Accumulated Dep.	-150000
Goodwill	13000
	770000		770000

Stockholders' equity with 1100 shares issued
Particulars	Amount ($)
Capital stock (200000+(20*1100)	222000
Add: capital excess of par value (20000+((300-20)*1100))	328000
Retained earnings	240000
Total	790000
Stockholders' equity with 1800 shares issued
Particulars	Amount ($)
Capital stock (200000+(20*1800)	236000
Add: capital excess of par value (20000+((300-20)*1800))	524000
Retained earnings	240000
Total	1000000
Stockholders' equity with 3000 shares issued
Particulars	Amount ($)
Capital stock (200000+(20*3000)	260000
Add: capital excess of par value (20000+((300-20)*3000))	860000
Retained earnings	240000
Total	1360000