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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 Summary

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

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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 ...

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