5. Financial reporting for mergers AaAa The Financial Accounting Standards Board
ID: 2791226 • Letter: 5
Question
5. Financial reporting for mergers AaAa The Financial Accounting Standards Board (FASB) eliminated the use of pooling-of-interests method for the accounting of mergers occurring after January 1, 2000. Since then, all mergers have been handled as purchases for accounting purposes. Consider the following case: Company A buys Company B for $30. The value of Company B's equity (total assets minus its total liabilities) is $50. Which of the following statements best describes the merger's effect on the merged company's consolidated balance sheet? O On the consolidated balance sheet, Company B's common stock value will be written up (recorded) on Company A's books at a value greater than was recorded on Company B's books. O Company B's liabilities will be deducted from Company A's liabilities in the consolidated balance sheet. O On the consolidated balance sheet, the value of Company B's assets will be written down (recorded) on Company A's books at a value lower than was recorded on Company B's books. Two weeks ago, National Enterprises Inc. (NE) and Sanger Machine Company agreed to a merger in which National will purchase Sanger using a stock-for-stock transaction. National's latest evaluation of the deal expects no synergistic benefits from the merger and has noted that its common stock is currently priced at $80.00 per share; Sanger's shares are trading for $72.00 per share. National has offered a 20% premium over the current price for Sanger's shares.Explanation / Answer
1. a is correct wherein the acquiring value of the company's b will be posted because company has bought company B at a certain price that is equity value and same should come on consolidated balance sheet.
2. value of stock = 72
20% premium means = 72*1.2 = 86.4
Total value = 86.4*750000 = 64.8 Mn
Each stock of national = $80
Number of shares required to be issued = 64.8*10^6/80 = 810000
3. total assets = 10+2 = 12 Mn
total equity = 5.75 + 5.75/5*810000 = 6.6815Mn
Sales = 60+15 = 75 Mn
Shares outstanding = 5 Mn + 810000 = 5.81Mn
Earnings per share
National = 7.2/5 = 1.44
Sangar = 1.2/0.75 = 1.6
Consolidated = 8.4/5.81 = 1.45
P to E ratio
National = 80*5/7.2 = 55.55
Sangar = 72*0.75/1.2 = 45
Consolidated = 80*5.81/8.4 = 55.33
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