Question

Assume that the following balance sheets are stated at book value.

Meat Co.
Current assets	$	12,600		Current liabilities	$	5,600
Net fixed assets		36,900		Long-term debt		10,100
				Equity		33,800
Total	$	49,500		Total	$	49,500

Loaf, Inc.
Current assets	$	3,700		Current liabilities	$	1,600
Net fixed assets		7,600		Long-term debt		2,200
				Equity		7,500
Total	$	11,300		Total	$	11,300

Suppose the fair market value of Loaf’s fixed assets is $11,100 versus the $7,600 book value shown. Meat pays $17,800 for Loaf and raises the needed funds through an issue of long-term debt. Construct the postmerger balance sheet, assuming that the purchase method of accounting is used.

Meat Co., post-merger
Current assets	$		Current liabilities	$
Fixed assets			Long-term debt
Goodwill			Equity
Total	$		Total	$

Answer 1

Answer:

Good will is the excess of cost paid to acquire Loaf over fair value of net identifiable assets.

Good will = Amount paid to acquire Loaf - Fair value of identifiable assets - Fair value of liabilities

= $17,800 - ($3,700 + $11,100) - ($1,600 + $2,200) = $6,800

Post-merger balance sheet:

Current assets = $12,600 + $3,700 = $16,300

Fixed assets = $36,900 + $11,100 = $48,000

Goodwill = $6,800

Current liabilities = $5,600 + $1,600 = $7,200

Long term debt = $10,100 + $17,800 (new debt taken) + $2,200 = $30,100

Post-merger balance sheet is as follows: