Question

On June 30, 2019, ABC Inc. completed the acquisition of 100% of DEF Enterprises. Fair values of acquired asset equaled predecessor book value except for intangible assets which were worth $10,000,000 and had a 5 year life. The acquisition price was $50,000,000 paid in a note payable to the seller bearing interest at 6%

Assume income tax rate of 0%

DEF Enterprises prepared the following stand-alone quarterly income statements for the four quarters in the year ended 12/31/19. These EXCLUDE all impacts of acquisition accounting.

Q1 19 Q2 19 Q3 19 Q4 19

Revenues $13,000,000 $14,000,000 $13,000,000 $11,000,000

Costs of sales (8,000,000) (8,500,000) (7,000,000) (8,000,000)

Operating expenses (2,000,000) (2,000,000) (2,000,000) (2,500,000)

    Pretax income $ 3,000,000 $ 3,500,000 $ 4,000,000 $ 500,000

Consolidated net income of ABC for the year ended 12/31/19 was as follows:

Revenues $150,000,000

Costs of sales (100,000,000)

Operating expenses (38,500,000)

Interest expense (1,500,000)

     Pretax income $ 10,000,000

8. What would the pro-forma pretax income of ABC be for 2019 assuming the acquisition had happened as the beginning of the year?

   1. $10,000,000

   2. $16,000,000

   3. $16,500,000

   4. $17,500,000

   5. None of the above

Answer 1

solution: $17,500,000

Explanation:

Proforma pre-tax income statement (considering as acquisition happens the beginning of the year)

ABC Inc. (DEF acquisition happens)

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Revenue of DEF enterprises for the four quarters = 51,000,000

Revenues of ABC Inc for the year = 150,000,000

Total Revenue = 201,000,000

cost of sales for the year ending  = 131,500,000

Operating income = 69,500,000

Expenses:

Operating expenses = 47,000,000

Earnings before interest = 22,500,000

Interest expenses = 1,500,000

total earnings = 21,000,000

expenses of interest =       3,500,000

Proforma pretax income of ABC inc. = 17,500,000