Question

On January 1, Richard Company acquired all the net assets of Ulmer Company by issuing debt with a market value of $350,000 and a payment of cash of $300,000. The fair value of Ulmer's identifiable net assets equaled their book values except for buildings and equipment which had a fair value of $120,000 greater than book value. Balance sheets for the two companies immediately preceding the acquisition were as follows:

	Richard Co.	Ulmer Co.
Cash	$400,000	$150,000
Building & Equipment	700,000	400,000
Accumulated Depreciation	(300,000)	(150,000)
Other Identifiable Assets	100,000	200,000
Total Assets	$900,000	$600,000
Liabilities	$200,000	$100,000
Common Stock	400,000	300,000
Additional Paid-in Capital	160,000	100,000
Retained Earnings	140,000	100,000
Total Liabilities and Equity	$900,000	$600,000

1) The total amount of equity (common stock, additional paid-in capital and retained earnings) that should appear on the balance sheet of the combined companies immediately following the merger should be:

a. 700,000

b. 1,100,000

c. 1,050,000

d. 1,400,000

e. none of the above

2) The amount of Goodwill to be recognized in connection with the merger is:

a. 0

b. 30,000

c. 120,000

d. 150,000

3) The dollar balance of the gross amount (i.e. without accumulated depreciation) in the Buildings & Equipment account on the balance sheet of the combined companies immediately following the merger should be:

a. 1,100000

b. 1220000

c. 1,070,000

d. 1090000

e none of the above

e. none of the above

Answer 1

Richard Company has acquired all the net assets of Ulmer Company against cash
payment and issue of debt instrument.This is not merger by consolidation but merger by
purchase of net assets wherein the consideration is paid to the equity shareholders of
Ulmer Company.Consolidated Financial Statements are not required to be prepared.
1) The total amount of equity that would appear in the balance sheet of the combined
companies immidiately after merger would be:
d. 1,400,000
Since,this is merger by purchase,the equity of Richard Company would only be considered
as the equity of the combined company.Richard Company has not bought the equity shares
of Ulmer Company but has bought the assets and liabilities of the Company by paying the
consideration to the equity shareholders of Ulmer Company.
2) The Goodwill to be recognized in connection with the merger is:
a. 0
Since, this is merger by purchase,the net assets would be shown at the value at which they
are acquired,i.e., their fair market value.Hence,no goodwill is needed to be recorded in the
consolidated books.
3) The dollar balance of the gross amount(i.e. without depreciation) in the Building & Equip
-ment account on the balance sheet of the combined companies immidiately following the
merger should be:
c. 1,070,000
Computation of Book value of Building & Equipment of Ulmer Company
	$
Gross Value of Building & Equipment	400,000
Less: Accumulated Depreciation	(150,000)
Book Value of Building & Equipment	250,000
Excess of Fair Value over Book Value of Building & Equipment	120,000
Value of Building & Equipment acquired by Richard Company	370,000
Gross Value of Building & Equipment in Combined Balance Sheet
	$
Gross Value of Building & Equipment - Richard Company	700,000
Gross Value of Building & Equipment acquired from Ulmer Company	370,000
Total Gross Value of Building & Equipment in Combined Balance Sheet	1,070,000