Question

Explain which method shows the strongest liquidity and solveñcl pau whlet mehod best reflects the true financial condition of the company. (c) Prepare G Company's consolidated balance sheet immediately after the combination using the worksheet approach and using the acquisition method. Problem 3-4 Three companies, A, L, and M, whose December 31, Year 5, balance sheets appear below, have agreed to combine as at January 1, Year 6. Each of the companies has a very small proportion of an intensely competitive market dom- inated by four much larger companies. In order to survive, they have decided to merge into one company. The merger agreement states that Company A will buy the assets and liabilities of each of the other two companies by issuing 27,000 common shares to Company L and 25,000 common shares to Company M, after which the two companies will be wound up. Company A's shares are currently trading at $5 per share. Company A will incur the following costs: Costs of issuing shares Professional fees 8,000 20,000 $28,000 152

Answer 1

Balance sheet fo Company A
Current Assets	$204,900
Plant and Equipment (net)	$365,600
Goodwill	$15,000
	$585,500
Liabilities	$186,000
Common Shares (102000)	$153,000
Additional Paid in Capital	$174,000
Retained Earnings	$72,500
	$585,500

Working Note:
Computation of Goodwill
Cost of shares transferred to acquire Company L		$135,000	(27000 x $5)
Fair value of the net assets transferred
Current Assets	$65,000
Plant and Equipment (net)	$98,000
Less: Liabilities	-$36,000	$127,000
Goodwill		$8,000
Cost of shares transferred to acquire Company M		$125,000	(25000 x $5)
Fair value of the net assets transferred
Current Assets	$68,000
Plant and Equipment (net)	$120,000
Less: Liabilities	-$70,000	$118,000
Goodwill		$7,000
Computation of balance for Company A
Current Assets	99900+65000+68000-8000-20000
Plant and Equipment (net)	147600+98000+120000
Goodwill	7000+8000
Liabilities	80000+36000+70000
Common Shares (102000)	102000*1.5
Additional Paid in Capital	((25000+27000)*3.5)-8000
Retained Earnings	92500-20000
Cost of issuing shares is the issuing cost and will be debited to additional paid in capital
Professtional fees will be charged to income statement thus will reduce retained earnings
Par value of common stock = 75000/50000 = $1.5
Additional paid in capital per share = $5-$1.5=$3.5
Common stock = 50000+27000+25000 shares