Issue stock, several of each priority accounts, goodwill, purchase entry and pro forma income.
Part A. Garden International has been looking to expand its operations and has decided to acquire the net assets of Iris Company. Garden will be issuing 10,000 shares of its $5 par value common stock for the net assets of Iris. Garden’s stock is currently selling for $27 per share. In addition, Garden paid $10,000 in direct acquisition costs. A balance sheet for Iris Company as of December 31, 20X1, is as follows:
|
Current assets: |
Current liabilities: |
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|
Accounts receivable |
$15,000 |
Accounts payable |
$22,000 |
|
Inventory |
38,000 |
Interest payable |
2,000 |
|
Prepaid expenses |
12,000 |
||
|
Total current assets |
$65,000 |
Total current liabilities |
$24,000 |
|
Investments |
19,000 |
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|
Fixed assets: |
Other liabilities: |
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|
Land |
$30,000 |
Long term notes payable |
40,000 |
|
Building |
70,000 |
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|
Equipment |
56,000 |
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|
Total fixed assets |
156,000 |
Total liabilities |
$64,000 |
|
Intangibles: |
Stockholders’ equity: |
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|
Patent |
$17,000 |
Common stock |
$40,000 |
|
Copyrights |
22,000 |
Paid in capital in excess of par |
120,000 |
|
Goodwill |
8,000 |
Retained earnings |
63,000 |
|
Total intangibles |
47,000 |
Total equity |
223,000 |
|
Total assets |
$287,000 |
Total liabilities and equity |
$287,000 |
In reviewing Iris’s balance sheet and in consulting with various appraisers, Garden has determined that the inventory is understated by $2,000, the land is understated by $10,000, the building is understated by $15,000, and the copyrights are understated by $4,000. Garden has also determined that the equipment is overstated by $6,000, and the patent is overstated by $5,000. The investments have a fair value of $33,000 on December 31, 20X1, and the amount of goodwill (if any) must be determined.
Required
Part A. Using the information above, do zone analysis, and record the acquisition of Iris Company on Garden International’s books.
Part B. Garden International wishes to estimate its net income after the acquisition of Iris. Projected income statements for 20X2 are as follows:
|
Income Statement Accounts |
Garden International |
Iris Company |
|
Sales revenue |
($350,000) |
($125,000) |
|
Cost of goods sold |
147,000 |
55,000 |
|
Gross profit |
($203,000) |
($70,000) |
|
Selling expenses* |
$100,000 |
$20,000 |
|
Administrative expenses* |
50,000 |
30,000 |
|
Depreciation expense |
12,500 |
8,600 |
|
Amortization expense |
1,000 |
3,900 |
|
Total operating expenses |
$163,500 |
$62,500 |
|
Operating income |
($39,500) |
($7,500) |
|
Nonoperating revenues and expenses: |
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|
Interest expense |
3,000 |
|
|
Investment income |
12,000 |
4,500 |
|
Income before taxes |
($51,500) |
($9,000) |
|
Provision for income taxes (40% rate) |
20,600 |
3,600 |
|
Net income |
($30,900) |
($5,400) |
Garden International estimates that the following amount of depreciation and amortization should be taken on the revalued assets of Iris Company.
|
Building depreciation |
$4,000 |
|
Equipment depreciation |
5,000 |
|
Patent amortization |
1,200 |
|
Copyright amortization |
2,600 |
Required
Part B. Using the above information, prepare a pro forma income statement for Garden International combined with Iris Company for the year ended December 31, 20X2.