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Merger as a Purchase

The Lager Brewing Corporation has acquired the Philadelphia Pretzel Company in a vertical merger. Lager Brewing has issued $300,000 in new long-term debt to pay for its purchase. ($300,000 is the purchase price.) Construct the balance sheet for the new corporation if the merger is treated as a purchase for accounting purposes. The balance sheets shown here represent the assets of both firms at their true market values. Assume these market values are also the book values.

Balance Sheet
(in $ thousands)
Current assets $ 400 Current liabilities $ 200
Other assets 100 Long-term debt 100
Net fixed assets 500 Equity 700
Total $1,000 Total $1,000
Balance Sheet
(in $ thousands)
Current assets $ 80 Current liabilities $ 80
Other assets 40 Equity 120
Net fixed assets 80
Total $200 Total $200

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Under purchase accounting, all the assets and liabilities of the acquired company will be added to the assets and liabilities of the acquiring company. The difference ...

Solution Summary

The solution explains how to prepare a balance sheet treating the merger as a purchase.