Question

6. The balance sheets of E Ltd. and J Ltd. on December 30, Year 6, were as follows:

	E Ltd.			J Ltd.
Cash and receivables	$	96,100		$	19,700
Inventory		57,200			9,100
Plant assets (net)		228,400			70,700
Intangible assets		24,100			6,200
	$	405,800		$	105,700
Current liabilities	$	63,200		$	30,100
Long-term debt		97,700			45,200
Common shares		153,400			46,600
Retained earnings (deficit)		91,500			(16,200	)
	$	405,800		$	105,700

On December 31, Year 6, E Ltd. issued 483 shares, with a fair value of $40 each, for 70% of the outstanding shares of J Ltd. Costs involved in the acquisition, paid in cash, were as follows:

Costs of arranging the acquisition	$	2,520
Costs of issuing shares		1,640
	$	4,160

The carrying amounts of J Ltd.’s net assets were equal to fair values on this date except for the following:

	Fair value
Plant assets	$	65,100
Long-term debt		40,400

E Ltd. was identified as the acquirer in the combination.

Required:

(a) Prepare the consolidated balance sheet of E Ltd. on December 31, Year 6, under the identifiable net assets method.

(b) Prepare the consolidated balance sheet of E Ltd. on December 31, Year 6, under the fair value enterprise method.

Answer 1

Answer:

Part-1: Introduction about question:

Dear students this question is related with Merger and Acquisition. In given example E-Ltd takes over the business of J Ltd. While on company is taking over business of another company then purchasing company take over all assets and liabilities of the selling company. Against that purchasing company is giving something and that something is called as purchase consideration. It may be in terms of shares or cash depends upon terms and condition of Merger and Acquisition. In given case following calculation is required.

Part-2: Consolidated balance sheet according to net assets method:

Step-1: Calculation of Net Assets:

Net Assets                          Total Assets Taken over                                xxxxx

Less:      Total LiabilitieNet Assets Taken over xxxxx

Calculation of Net Assets:

	E Ltd	E Ltd
	$	$	$	$
Net Assets
Total Assets Taken
Cash and receivables	96100		19700
Inventory	57200		9100
Plant assets (net)	228400		65100
Intangible assets	24100	405800	6200	100100
Less:
Total Liabilites Taken over
Current liabilities	63200		30100
Long-term debt	97700	160900	40100	70200
Net Assets		244900		29900

Note: Remember that while calculations of Net assets if new values of assets or liabilities are given then consider new values only. Here Plant assets and Long term Dents having new values in adjustment so consider that amount.

Step-2: Calculation purchase consideration:

Now E ltd issued common shares to J ltd and rest of the amount in cash which are as under.

Common shares issued to J.Ltd	19320
( 483 Shares * $ 40 )
Cost of Acquisition:
Cost of Arranging the Acquisition	2520
Costs of issuing shares	4160
Total Purchase Consideration	26000

Step-3: Calculation of Goodwill or Capital Reserve:

Capital Reserve = Net Assets Taken over- Purchase consideration

                                = 29900 – 26000

                                = $ 3900

Step-4 Consolidated Balance sheet:

Particulars	E Ltd	E Ltd	Consolidated
	$	$	$
Total Assets
Cash and receivables	96100	19700	115800
Inventory	57200	9100	66300
Plant assets (net)	228400	65100	293500
Intangible assets	24100	6200	30300
Total Assets:			505900
Total Liabilities
Current liabilities	63200	30100	93300
Long-term debt	97700	40100	137800
Common shares	153400	19320	172720
Retained Earnings	91500	0	91500
Capital Reserves	10580	0	10580
(3900+2520+4160)
			505900

Part-3:

Prepare the consolidated balance sheet of E Ltd. on December 31, Year 6, under the fair value enterprise method.

Step-1           Total of old shares:                       $

J Ltd 46600

Total Share Common Shares 46600

Step-2:          Profit/ Loss in common shares:

                        Old common shares                      46600

            Less:   New common shares                    19320

                        Difference 27280

Step-3:          Adjusted Retained Earnings:

                        Retained Earnings [E ltd + J ltd] 102580

                        [91500- 16200 + 27280]

Step-4: Consolidated Balance sheet:

Particulars	E Ltd	E Ltd	Consolidated
	$	$	$
Total Assets
Cash and receivables	96100	19700	115800
Inventory	57200	9100	66300
Plant assets (net)	228400	70700	299100
Intangible assets	24100	6200	30300
Total Assets:			511500
Total Liabilites
Current liabilities	63200	30100	93300
Long-term debt	97700	45200	142900
Common shares	153400	19320	172720
Retained Earnings			102580
(91500-16200+2520+1640)
			511500