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Merger as a Purchase

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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 ...

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

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Decision to purchase a manufacturing company

Mr. Jones wants to buy Smithon Manufacturing because it is very profitable. Right now it has 30 shareholders but no single majority shareholder. It is a C corporation with a fiscal year-end of December 1. In order for Mr. Jones to buy this company, he will need to invest a lot of money in new manufacturing equipment, which means that Smithon will incur a loss for two years. Mr. Jones want to buy the company effective January 1. He thinks, he should buy the company from the shareholders and convert it to an S corporation. Also, Mr. Jones wants a fiscal year-end that is also a calendar year-end, i.e., December 31. They should consider whether Mr. Jones could issue shares of stock from Johnson Services which is a C corporation to the shareholders of Smithon in an exchange of shares. That way, the current Smithon owners would become new shareholders (but not owners) of Johnson Services and he would get all their shares of Smithon. If Mr. Jones does so, he could probably offset Smithon's profits with the losses from Johnson Services.


1. Should Mr. Jones purchase the stock of Smith outright, leaving Smithon intact? What about issuing debt in his Johnson Services company to pay for the Smith Company - would that raise debt to equity issues?
2. Should Mr. Jones convert Smithon to an S corporation and change the fiscal year end to a calendar year end?
3. What potential income tax ramifications exist for Mr. Jones personally if he purchases the stock of Smithon and converts it to an S corporation?
4. Should Mr. Jones merge Johnson Services with Smithon? What type of merger or acquisition would be best (i.e., A type, etc.)?

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