Question

EXERCISE 2‐2

Acquisition Method LO 6

The balance sheets of Petrello Company and Sanchez Company as of January 1, 2019, are presented below. On that date, after an extended period of negotiation, the two companies agreed to merge. To effect the merger, Petrello Company is to exchange its unissued common stock for all the outstanding shares of Sanchez Company in the ratio of 1/212 share of Petrello for each share of Sanchez. Market values of the shares were agreed on as Petrello, $48; Sanchez, $24. The fair values of Sanchez Company's assets and liabilities are equal to their book values with the exception of plant and equipment, which has an estimated fair value of $720,000.

	Petrello	Sanchez
Cash	$ 480,000	$ 200,000
Receivables	480,000	240,000
Inventories	2,000,000	240,000
Plant and equipment (net)	3,840,000	800,000
Total assets	$ 6,800,000	$ 1,480,000
Liabilities	$ 1,200,000	$ 320,000
Common stock, $16 par value	3,440,000	800,000
Other contributed capital	400,000	—0—
Retained earnings	1,760,000	360,000
Total equities	$ 6,800,000	$ 1,480,000

Required:

Prepare a balance sheet for Petrello Company immediately after the merger.

Answer 1

Balance sheet of Petrello Company immediately after the merger
Asset
cash [480000+200000]	$    680,000
Receivables [480000+240000]	$    720,000
Inventories   [2000000+240000]	$ 2,240,000
Total current asset		$ 3,640,000
Non current asset
Intangible fixed asset
Goodwill (on acquisition)	$    120,000
Tangible fixed asset
Plant and Equipment (net) [3840000+720000]	$ 4,560,000
Total non current asset		$ 4,680,000
Total asset		$ 8,320,000
Liabilities and equity
Liabilities [1,200,000+320,000]		$ 1,520,000
Equity
common stock (par value $16) [3440000+400000]	$ 3,840,000
contributed capital [400000+800000]	$ 1,200,000
Retained earnings	$ 1,760,000
Total equity		$ 6,800,000
Total liabilities and equity		$ 8,320,000
Value paid for acquisition (800000/16*1/2*48)	$    1,200,000
Net worth of Sanchez Co.	$    1,080,000
(200000+240000+240000+720000)-320000
Goodwill on acquisition	$       120,000
Common stock (25000*16)	$       400,000
Other contributed capital (1,200,000-400,000)	$       800,000
	$    1,200,000