11-47 Purchased Goodwill Consider the following balance sheets ($ in millions) C

Question

11-47 Purchased Goodwill Consider the following balance sheets ($ in millions) Company A Company B Cash Inventories Plant assets, net Total assets Common stock and paid-in surplus Retained earnings Total liab. and stk. equity $150 65 65 $280 $ 80 200 $ 280 $15 25 30 $ 70 $ 30 40 $ 70 Company A paid $90 million to Company B stockholders for all their stock. The "fair value" of the plant assets of Company B is $40 million. The fair value of cash and inventories is equal to their carrying amounts. Companies A and B continued to keep separate books. 1. Prepare a tabulation showing the balance sheets of companies A and B, intercompany elimi nations, and the consolidated balance sheet immediately after the acquisition. 2. Suppose that $50 million instead of $40 million of the total purchase price of $90 million could logically be assigned to the plant assets. How would the consolidated accounts be affected? 3. Refer to the facts in requirement 2. Suppose Company A had paid $100 million instead of $90 million. State how your tabulation in requirement 2 would change

Explanation / Answer

1) Balance Sheets after acquisition: C A C B C A&B cash 60 15 75 investories 65 25 90 Goodwill 10 GOODWILL GOT RAISED Acquisition ofC B 90 0 0 Plant assets 65 30 105 65+40 FV Total Assets 280 70 280 Com stock and paid in 80 30 80 RE 200 40 200 Total Liab and Stk Eq. 280 70 280 2) Balance Sheets after acquisition: C A C B C A&B cash 60 15 75 investories 65 25 90 Goodwill 0 GOODWILL GOT VANISHED Acquisition ofC B 90 0 0 Plant assets 65 30 115 65+50 FV    (FV increased) Total Assets 280 70 280 Com stock and paid in 80 30 80 RE 200 40 200 Total Liab and Stk Eq. 280 70 280 3) Balance Sheets after acquisition: C A C B C A&B cash 50 15 65 investories 65 25 90 Goodwill 10 GOODWILL GOT RAISED Acquisition ofC B 100 0 0 INCREASE IN ACQ. PRICE Plant assets 65 30 115 65+50 FV Total Assets 280 70 280 Com stock and paid in 80 30 80 RE 200 40 200 Total Liab and Stk Eq. 280 70 280

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