Question

Consider the following premerger information about Firm X and Firm Y: Firm X Firm Y Total earnings $ 88,000 $ 18,500 Shares outstanding 45,000 20,000 Per-share values: Market $ 45 $ 16 Book $ 16 $ 7 Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $5 per share, and that neither firm has any debt before or after the merger. Construct the postmerger balance sheet for Firm X assuming the use of the purchase accounting method. (Do not round intermediate calculations.)

Assets from X $

Assets from Y

Goodwill

Total Assets XY $

Answer 1

			(Amount in $)
Particulars			Firm X	Firm Y
Total earnings			88000	18500
Share Outstanding			45000	20000
Per share values :
Market Value			45	16
Book value			16	7
With the purchase method,
The assets of combined firm will be the book value of firm X (Acquiring company ) + Market value of firm Y (Targeting company)
	Assets from X		=	(45000*16)	=	$720,000
	Assets from y		=	(20000*16)	=	$320,000
The purchase price of firm Y is the number of shares outstanding into Sum of Current stock price per share plus premium per share
Purchase price of Y = (20000)*(16+5)				=	$420,000
Therefore Good will = $420000 - $ 320000				=	$100,000
Total assets of combined company XY = $ 720000+ $ 320000 +$100000							$1,140,000