Question

In: Accounting

Myers Company Ltd. was formed 10 years ago by the issuance of 24,000 common shares to...

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

Solutions

Expert Solution

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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


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