In: Accounting
Myers Company Ltd. was formed 10 years ago by the issuance of 24,000 common shares to three shareholders. Four years later, the company went public and issued an additional 30,000 common shares.
The management of Myers is considering a takeover in which Myers would purchase all of the assets and assume all of the liabilities of Norris Inc. Two alternative proposals are being considered:
PROPOSAL 1
Myers would offer to pay $426,400 cash for the Norris net assets. In addition, Myers would incur legal, appraisal, and finders’ fees for a total cost of $5,200.
PROPOSAL 2
Myers would issue 52,000 shares currently trading at $8.20 each for the Norris net assets. Other costs associated with the takeover would be as follows:
Legal, appraisal, and finders’ fees |
$ |
5,200 |
Costs of issuing shares |
7,200 |
|
$ |
12,400 |
|
Norris shareholders would be offered five seats on the 10-member board of directors of Myers, and the management of Norris would be absorbed into the surviving company.
Balance sheet data for the two companies prior to the combination are as follows:
Myers |
Norris |
||||||||||
Carrying Amount |
Carrying Amount |
Fair Value |
|||||||||
Cash |
$ |
532,000 |
$ |
54,500 |
$ |
54,500 |
|||||
Accounts receivable |
169,200 |
63,450 |
58,200 |
||||||||
Inventory |
376,120 |
112,110 |
136,220 |
||||||||
Land |
467,000 |
77,000 |
212,000 |
||||||||
Buildings (net) |
252,505 |
23,020 |
26,020 |
||||||||
Equipment (net) |
80,945 |
19,705 |
17,945 |
||||||||
$ |
1,877,770 |
$ |
349,785 |
||||||||
Current liabilities |
$ |
135,335 |
$ |
43,115 |
43,115 |
||||||
Non-current liabilities |
430,000 |
152,000 |
157,000 |
||||||||
Common shares |
502,000 |
102,000 |
|||||||||
Retained earnings |
810,435 |
52,670 |
|||||||||
$ |
1,877,770 |
$ |
349,785 |
||||||||
Required:
(a) Prepare the journal entries of Myers for each of the two proposals being considered. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
Proposal 1
Proposal 2
(b) Prepare the balance sheet of Myers after the takeover for each of the proposals being considered.
Proposal 1
Proposal 2
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Ans : NOte 1: |
PROPOSAL 1 |
PROPOSAL 2 |
|
Acquisition cost |
$ 426,400 |
$ 426,400 ( 52000sh * $8.20) |
|
Fair value of net assets ( note 2) |
$ (304770) |
$ (304770) |
|
Goodwill |
$ 121630 |
$ 121630 |
Note 2 : Norris |
FAIR VALUE |
Cash |
54,500 |
Accounts receivable |
58,200 |
Inventory |
136,220 |
Land |
212,000 |
Buildings (net) |
26,020 |
Equipment (net) |
17,945 |
Total assets |
504885 |
Less : |
|
Current liabilities |
-43,115 |
Non Current liabilities |
-157,000 |
Net Assets at fair value |
304770 |
Ans (a) Journal entries
S .No |
PROPOSAL 1 |
PROPOSAL 2 |
|||
1) |
Cash |
54,500 |
54,500 |
||
Accounts receivable |
58,200 |
58,200 |
|||
Inventory |
136,220 |
136,220 |
|||
Land |
212,000 |
212,000 |
|||
Buildings (net) |
26,020 |
26,020 |
|||
Equipment (net) |
17,945 |
17,945 |
|||
Goodwill ( Note 1) |
121630 |
121630 |
|||
To Current liabilities |
43,115 |
43,115 |
|||
To Non Current liabilities |
157,000 |
157,000 |
|||
To Cash ( Proposal 1) |
426,400 |
----- |
|||
To Common Stock ( Proposal 2) (52000 *8.20) |
---- |
426,400 |
|||
(To record the net acquisition of assets) |
|||||
2) |
Professional fees expense / Investment acquisition exp |
5200 |
5200 |
||
Cash |
5200 |
5200 |
|||
(To record the professional fee expense) |
|||||
3) |
Common Stock |
N.A. |
7200 |
||
To cash |
N,A, |
7200 |
|||
(to record share issue cost ) |
Ans (B) CONSOLIDATED BAlance sheet
PROPOSAL 1 |
PROPOSAL 2 |
|||
Cash |
532,000 +54,500 - 426,400 – 5200 |
154900 |
532,000 +54,500 – 5200 -7200 |
574100 |
Accounts receivable |
169,200 +58,200 |
227400 |
169,200 +58,200 |
227400 |
Inventory |
376,120 +136,220 |
512340 |
376,120 +136,220 |
512340 |
Land |
467,000 +212,000 |
679000 |
467,000 +212,000 |
679000 |
Buildings (net) |
252,505 + 26,020 |
278525 |
252,505 + 26,020 |
278525 |
Equipment (net) |
80,945 + 17,945 |
98890 |
80,945 + 17,945 |
98890 |
Goodwill |
121630 |
121630 |
||
Total assets |
2072685 |
2491885 |
||
Current liabilities |
135,335 + 43,115 |
178450 |
135,335 + 43,115 |
178450 |
Non Current liabilities |
430,000 + 157,000 |
587000 |
430,000 + 157,000 |
587000 |
Common shares |
502,000 |
502000 |
502,000 + 426400 – 7200 |
921200 |
Retained earnings |
810,435 – 5200 |
805235 |
810,435 -5200 |
805235 |
Total LIABILITIES |
2072685 |
2491885 |
||