Pro forma income after purchase. On January 1, 20X1, Arthur Enterprises acquired Ann’s Tool Company. Prior to the merger of the two companies, each company had prepared an estimate of its income for the year ended December 31, 20X1. These estimates are as follows:
|
Income Statement Accounts |
Arthur Enterprises |
Ann’s Tool Company |
|
Sales revenue |
$550,000 |
$140,000 |
|
Cost of goods sold |
200,000 |
50,000 |
|
Gross profit |
$350,000 |
$90,000 |
|
Selling expenses |
$125,000 |
$30,000 |
|
Administrative expenses |
150,000 |
45,000 |
|
Depreciation expense |
13,800 |
7,500 |
|
Amortization expense |
5,600 |
2,000 |
|
Total operating expenses |
$294,400 |
$84,500 |
|
Operating income |
$55,600 |
$5,500 |
|
Nonoperating revenues and expenses: |
||
|
Interest expense |
4,000 |
|
|
Interest income |
7,000 |
|
|
Dividend income |
4,000 |
|
|
Income before taxes |
$66,600 |
$1,500 |
|
Provision for income taxes (30% rate) |
19,980 |
450 |
|
Net income |
$46,620 |
$1,050 |
An analysis of the merger agreement revealed that the purchase price exceeded the fair value of all assets by $40,000. The book and fair values of Ann’s Tool Company are given in the table below along with an estimate of the useful lives of each of these asset categories.
|
Asset Account |
Book Value |
Fair Value |
Useful Life |
|
Inventory |
$30,000 |
$28,000 |
Sold during 20X1 |
|
Land |
50,000 |
80,000 |
Unlimited |
|
Buildings |
75,000 |
125,000 |
25 years |
|
Equipment |
32,000 |
56,000 |
8 years |
|
Truck |
1,000 |
3,000 |
2 years |
|
Patent |
12,000 |
18,000 |
6 years |
|
Computer software |
0 |
10,000 |
2 years |
|
Copyright |
0 |
20,000 |
10 years |
Management believes the company will be in a combined tax bracket of 30%. The company uses the straight line method of computing depreciation and amortization and assigns a zero salvage value.
Required
Using the above information, prepare a pro forma income statement for the combined companies.