Question

Balance sheets for Salt Company and Pepper Company on December 31, 2018, follow:

	Salt	Pepper
ASSETS
Cash	$ 95,000	$ 180,000
Receivables	117,000	230,000
Inventories	134,000	231,400
Plant assets	690,000	1,236,500
Total assets	$1,036,000	$1,877,900
EQUITIES
Accounts payable	$ 180,000	$ 255,900
Mortgage payable	152,500	180,000
Common stock, $20 par value	340,000	900,000
Other contributed capital	179,500	270,000
Retained earnings	184,000	272,000
Total equities	$1,036,000	$1,877,900

Pepper Company tentatively plans to issue 30,000 shares of its $20 par value stock, which has a current market value of $37 per share net of commissions and other issue costs. Pepper Company then plans to acquire the assets and assume the liabilities of Salt Company for a cash payment of $800,000 and $300,000 in long‐term 8% notes payable. Pepper Company's receivables include $60,000 owed by Salt Company. Pepper Company is willing to pay more than the book value of Salt Company assets because plant assets are undervalued by $215,000 and Salt Company has historically earned above‐normal profits.

Prepare a pro forma balance sheet showing the effects of these planned transactions.

Answer 1

Workings:
Net Assets acquired by Pepper Company
Assets
Cash	$              95,000
Receivables	$            117,000
Inventories	$            134,000
Plant Assets(F.M.V)(690000+215000)	$            905,000	$        1,251,000
Less: Liabilities taken over
Accounts Payable	$            180,000
Mortgage Payable	$            152,500	$            332,500
Net Assets Taken over		$            918,500
Consideration Paid
Cash	$            800,000
8% Notes Payable	$            300,000	$        1,100,000
Calculation of Goodwill
Consideration Paid	$        1,100,000
Net Assets taken Over	$            918,500
	$            181,500
Pepper Company
Proform Balance Sheet
as on ….
Assets
Cash	$            585,000
Receivables	$            347,000
Inventories	$            365,400
Plant Assets	$        2,141,500
Goodwill(Note given above)	$            181,500
Total Assets	$        3,620,400
Equities
Accounts Payable	$            435,900
Mortgage Payable	$            332,500
8% Notes Payable	$            300,000
Common Stock	$        1,500,000
Other Contributed Capital	$            780,000
Retained Earnings	$            272,000
Total Equities	$        3,620,400
Workings
Cash
Balance of Pepper co.	$            180,000
Common Stock issued at premium(30000*37)	$        1,110,000
Balance of Salt Co.	$              95,000
Cash Paid to Salt Co.	$          (800,000)
	$            585,000
Receivables
Balance of Pepper co.	$            230,000
Balance of Salt Co.	$            117,000
	$            347,000
Inventories
Balance of Pepper co.	$            231,400
Balance of Salt Co.	$            134,000
	$            365,400
Plant Assets
Balance of Pepper co.	$        1,236,500
Balance of Salt Co.(at market value shown above)	$            905,000
	$        2,141,500
Accounts Payable
Balance of Pepper co.	$            255,900
Balance of Salt Co.	$            180,000
	$            435,900
Mortgage Payable
Balance of Pepper co.	$            180,000
Balance of Salt Co.	$            152,500
	$            332,500
8% Notes Payable
Issued to Salt Co. as consideration	$            300,000
Common Stock
Balance of Pepper co.	$            900,000
Issued 30000 stock of $20 par value	$            600,000
	$        1,500,000
Other Contributed Capital
Balance of Pepper co.	$            270,000
Securities Premium on Stock issued(30000*17)	$            510,000
	$            780,000
Retained Earnings
Balance of Pepper co.	$            272,000