Question

Assume that the following balance sheets are stated at book value.

Jurion Co.
Current assets	$	29,000		Current liabilities	$	6,200
Net fixed assets		34,100		Long-term debt		10,400
				Equity		46,500
Total	$	63,100		Total	$	63,100

James, Inc.
Current assets	$	5,700		Current liabilities	$	3,200
Net fixed assets		10,000		Long-term debt		2,500
				Equity		10,000
Total	$	15,700		Total	$	15,700

Suppose the fair market value of James's fixed assets is $16,100 versus the $10,000 book value shown. Jurion pays $28,500 for James and raises the needed funds through an issue of long-term debt. Construct the postmerger balance sheet under the purchase method of accounting. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

$ Current assets Fixed assets Goodwill Jurion Co., post-merger 34,700 Current liabilities Long-term debt Equity Total Total

Answer 1

Jurion Co., post-merger Current Assets ($29,000 + $5,700) $34,700 Current Liabilities $6,200 Net Fixed assets ($34,100 + $16,100) $50,200 Long-term debt $38,900 Goodwill $6,700 Equity $46,500 Total $91,600 Total $91,600 Since the acquisition is funded by long-term debt, the post-merger balance sheet will have long- term debt equal to the original long-term debt of Jurion's balance sheet plus the new long- term debt issue, so: Post-merger long-term debt = $10,400 + $28,500 = $38,900 Goodwill will be created since the acquisition price is greater than the market value. The goodwill a mount is equal to the purchase price minus the market value of assets. The market value of current assets is equal to the book value. Goodwill created = $28,500 - $16,100 (market value Fixed Assets) - $5,700 (market value Current Assets) = $6,700 Current liabilities and equity will remain the same as the premerger balance sheet of the acquiring firm.