Two Hollywood companies had the following balance sheet accounts as of December 31, 20X7 ($ in millions):
Lexia Hudson
Lexia Hudson
Cash and receivables $60
$44 Current
liabilities
$100 $40
Inventories
240 6
Common stock
200 20
Plant assets,
net
300 190 Retained
earnings 300
180
Total assets
$600 $240 Total
liab. and stk. eq. $600
$240
Net income for 20X7
$38 $8
On January 4, 20X8, these entities combined. Lexia issued $360 million of its shares (at market value) in exchange for all the shares of Hudson, a motion picture division of a large company. The inventory of films acquired through the combination had been fully amortized on Hudson's books.
During 20X8, Hudson received revenue of $42 million from the rental
of films from its inventory.
Lexia earned $40 million on its other operations (i.e., excluding
Hudson) during 20X8. Hudson
broke even on its other operations (i.e., excluding the film rental
contracts)
during 20X8.
1. Prepare a consolidated balance sheet for the combined company
immediately after the combination. Assume $160 million of the
purchase price was assigned to the inventory of films. The fair
values of all other Hudson assets and liabilities were equal to
their book values.
2. Prepare a comparison of Lexia's consolidated net income between
20X7 and 20X8, where the cost of the film inventories would be
amortized on a straight-line basis over 4 years. What would be the
net income for 20X8 if the $160 million were assigned to goodwill
instead of the inventory of films and goodwill was not
amortized?
Two Hollywood companies had the following balance sheet accounts as of December 31, 20X7 ($ in mi...
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