Problem 2-5 Balance sheets for Salt Company and Pepper Company on December 31, 2

Question

Problem 2-5

Balance sheets for Salt Company and Pepper Company on December 31, 2013, follow:

Pepper Company tentatively plans to issue 27,000 shares of its $20 par value stock, which has a current market value of $41 per share net of commissions and other issue costs. Pepper Company then plans to acquire the assets and assume the liabilities of Salt Company for a cash payment of $830,900 and $290,600 in long-term 8% notes payable. Pepper Company’s receivables include $58,680 owed by Salt Company. Pepper Company is willing to pay more than the book value of Salt Company assets because plant assets are undervalued by $227,250 and Salt Company has historically earned above-normal profits.

Prepare a pro forma balance sheet showing the effects of these planned transactions.

Salt Pepper ASSETS Cash $88,130 $188,950 Receivables 112,610 252,920 Inventories 129,250 253,773 Plant assets 697,800 1,251,030 Total assets $1,027,790 $1,946,673 EQUITIES Accounts payable $183,250 $236,177 Mortgage payable 138,350 168,050 Common stock, $20 par value 317,360 811,400 Other contributed capital 172,530 283,720 Retained earnings 216,300 447,326 Total equities $1,027,790 $1,946,673 PEPPER COMPANY Pro Forma Balance Sheet Giving Effect to Proposed Issue of Common Stock and Note Payable for All of the Common Stock of Salt Company under Purchase Accounting December 31, 2013 Audited Pro Forma Balance Sheet Adjustments Balance Sheet Cash Receivables Inventories Plant Assets Goodwill Total Assets Accounts Payable Notes Payable, 8% Mortgage Payable Common Stock, $20 par Additional Paid-in Capital Retained Earning:s $188,950 252,920 253,773 1,251,030 0 1,946,673 236,177 0 168,050 811,400 283,720 447,326 1,946,673 Total Liabilities and Equity

Explanation / Answer

Audited Adjustments Proforma Balance Sheet Balance Sheet Cash 188950 364230 553180 Receivables 252920 112610 365530 Inventories 253773 129250 383023 Plant Assets 1251030 925050 2176080 Goodwill 129380 129380 Total Assets 1946673 1660520 3607193 Accounts Payable 236177 124570 360747 Notes Payable 8% 290600 290600 Mortgage Payable 168050 138350 306400 Common Stock 811400 1107000 1918400 Additional paid in capital 283720 283720 Retained Earnings 447326 447326    Total liabilities and equity 1946673 1660520 3607193 Adjustments columns will be the assets and liabilities taken over by Pepper Co. plus the payment made for acquisition. 1.Cash Cash received on issue of common stck 27000 x 41 1107000 Cash paid for acquisition -830900 Cash balance of Salt Co. 88130 Adjustment 364230 Receivbles and inventories are startight from Salt Co. Balance sheet. 2. Plant Assets Balance as per Salt Co. B/S 697800 Undervaluation 227250 Adjustment 925050 3. Goodwill is calculated as follows: Assets of Salt Co. 1027790 Acounts Payable of Salt Co. -183250 Mortgage Payable -138350 Payables to Pepper Co. 58680 Net Assets at book value 764870 Add undervalation of Plant 227250 Total assets acquired 992120 Price Paid(830,900+290,600) 1121500 Goodwill 129380

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