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    Purchase accounting

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    On December 31, 2004, Acquire Company acquired Target Company. Acquire issued $5,000,000 in stock in exchange for 85% of the outstanding shares of Target. The acquisition was treated as a purchase. The historical cost balance sheets of Acquire and Target prior to the acquisition are given below.

    Please see attached.

    Acquire Company Balance Sheet
    For the Year Ended 12/31/04 (000s omitted)
    Cash $320
    Inventories 640
    Current Assets 960

    Property, Plant, and Equipment (net) 1,540
    Total Assets $2,500

    Current Liabilities $720

    Long-term Debt 530
    Common Stock 1,050
    Retained Earnings 200
    Total Liabilities & Equity $2,500
    Target Company Balance Sheet
    For the Year Ended 12/31/04 (000s omitted)
    Cash $800
    Inventories 420
    Current Assets 1,220

    Property, Plant, and Equipment (net) 1,980
    Total Assets $3,200

    Current Liabilities $320

    Long-term Debt 580
    Common Stock 1350
    Retained Earnings 950
    Total Liabilities & Equity $3,200

    At the time of the acquisition, the fair market value of Target's assets, liabilities and identifiable intangibles were:
    ? Inventory $470,000
    ? Identifiable Intangibles 620,000
    ? Property Plant and Equipment 3,100,000
    ? Long-term Debt 575,000

    A. Prepare Acquire's Consolidated Balance Sheet on December 31, 2004 after the merger.

    B. At the end of 2005, Acquire estimates the fair value of Target's net assets to be $3,800,000. What effect will the change in the fair value of Target's assets and liabilities have upon Acquire's 2005 Consolidated Balance Sheet and Income Statement? Assume that Target earned a very small net income for 2005 and paid no upstream dividends to Acquire.

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    Solution Preview

    a. The excel file gives the purchase accounting. The value paid is 5,000,000. The net book value of the target company comes to Total assets-CL-LT Debt = 3200-320-580=2300. An amount of 5000-2300=2700 has been paid over and above the net book value. The assets have been increased to fair value, the change ...

    Solution Summary

    The solution explains purchase accounting when a acquiring company takesover a target company