Question

Consider the following premerger information about Firm X and Firm Y:

	Firm X			Firm Y
Total earnings	$	88,000		$	18,500
Shares outstanding		45,000			20,000
Per-share values:
Market	$	45		$	16
Book	$	16		$	7

Assume that Firm X acquires Firm Y by issuing long-term debt for all the shares outstanding at a merger premium of $5 per share, and that neither firm has any debt before the merger.

List the assets of the combined firm assuming the purchase accounting method is used.

Answer 1

List of assets of the combined firm:

1) Assets (Firm X) = Shares outstanding of firm X x Book value per share of firm X

= 45,000 x $16

= $720,000

2)

Assets (Firm Y) = Shares outstanding of firm Y x Market value per share of firm Y

= 20,000 x $16

= $320,000

3) Goodwill = [Shares outstanding of firm Y x (Market value per share of firm Y + Merger premium) ] - Assets acquired (Firm Y)

= [20,000 x ($16 + $5)] - $320,000

= $420,000 - $320,000

= $100,000

Therefore, the total assets amount to $1,140,000 ($720,000+$320,000+$100,000).