Question

Arizona Corp. had the following account balances at 12/1/19:

• Receivables: $96,000; Inventory: $240,000; Land: $720,000; Building: $600,000; Liabilities: $480,000; Common stock: $120,000; Additional paid-in capital: $120,000; Retained earnings, 12/1/19: $840,000; Revenues: $360,000; and Expenses: $264,000.

Several of Arizona's accounts have fair values that differ from book value. The fair values are:

• Land — $480,000; Building — $720,000; Inventory — $336,000; and Liabilities — $396,000.

Inglewood Inc. acquired all of the outstanding common shares of Arizona by issuing 20,000 shares of common stock having a $6 par value, but a $66 fair value. Stock issuance costs amounted to $12,000.

Required:

1. Prepare a fair value allocation and goodwill schedule at the date of the acquisition.
2. Imagine you are the decision maker at Inglewood Inc. Determine in 525- words whether you would encourage acquiring Arizona Corp? Be sure to include your rationale.

Answer 1

Valuation of Business Using Fair Value Method

Particulars	Fair Value
Receivables	96,000
Inventory	336,000
Land	480,000
Building	720,000
Revenue	360,000
Less: Liabilities	(396,000)
Less: Expense	(264,000)
Value of Business	1,332,000

Calculation of Purchase Consideration
No of Shares Issues	20,000
Par Value	6
Fair Value	66
Total Share Value	1,320,000
Share issue Expense	12,000
Purchase Consideration	1,308,000

Calculation of Goodwill/capital Reserve
Purchase Consideration	1,308,000
Fair Value of Business	1,332,000
Goodwill (Capital Reserve)	(24,000)

As per my recommendation Inglewood Inc. should go with the plan of acquiring Arizona Corp because they are paying less than the actual fair value of the business. The above question is solved using the fair value method of valuation that is the assets and liabilities are valued at fair value where ever the value is given and others at book value. In fair value method is used only assets taken over is compared with outside liabilities, hence retained earnings are not considered for valuation. When valuation is compared with the purchase consideration offered by Inglewood Inc its understood that fair value of the business is more by $24000/- However the company should do proper analysis with respect        to risk factors, competitors, Investment alternatives, economic environment, History of Business, Nature of Business and financial performance.