Assignment Problems For Chapter 3

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Assignment Problems For Chapter 3

(The solutions for these problems are only available in the solutions manual that has been provided to your instructor.)

Assignment Problem Three - 1 (Purchase Of Assets)

On December 31, 2009, the assets and liabilities of the Davis Company and the Jones Company have fair values and book values as follows:

Davis and Jones Companies Balance Sheets As At December 31, 2009

Davis Jones

Book Value Fair Value Book Value Fair Value

Cash $ 450,000 $ 450,000 $ 375,000 $ 375,000

Accounts Receivable 560,000 545,000 420,000 405,000

Inventories 1,200,000 1,150,000 875,000 950,000

Net Plant And Equipment 2,800,000 3,200,000 1,575,000 1,250,000 Total Assets $5,010,000 $5,345,000 $3,245,000 $2,980,000

Current Liabilities $ 325,000 $ 325,000 $ 295,000 $ 295,000

Bonds Payable 1,200,000 1,400,000 870,000 910,000

Future Income Tax Liability 780,000 N/A 430,000 N/A

No Par Common Stock 2,100,000 N/A 1,200,000 N/A

Retained Earnings 605,000 N/A 450,000 N/A

Total Equities $5,010,000 $3,245,000

The No Par Common Stock of the Davis Company, prior to the business combination, consists of 42,000 shares issued at an average price of $50 per share. The No Par Common Stock of the Jones Company consists of 60,000 shares issued at an average price of $20 per share. On December 31, 2009, the Davis Company issues 30,000 shares of its No Par Common Stock in return for all of the assets and liabilities of the Jones Company. On this date the Davis Company shares are trading at $65 per share while the Jones Company shares are trading at $32.50 per share.

Required: Prepare the December 31, 2009 Balance Sheet that would be required for the combined company resulting from the business combination transaction.

Assignment Problem Three - 2 (Contingent Consideration, GAAP Conversion) On December 31, 2009, Public Ltd. acquires all of the outstanding shares of Private Inc. The consideration consists of 100,000 Public Ltd. shares plus $1,300,000 in cash. At the time of issue, the Public Ltd. shares are trading at $10.50. As part of the acquisition contract, Public Ltd. agrees that, if by the end of 2010 their shares are not trading at a price of $12.00 or more, it will pay an additional $150,000 in cash to the former shareholders of Private Inc. Public management estimates the fair value of this contingent payment to be $60,000 on December 31, 2009.

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On December 31, 2009, the pre-business combination Balance Sheets of the two Companies are as follows:

Public Ltd. and Private Inc. Balance Sheets As At December 31, 2009

Public Ltd. Private Inc.

Cash $1,892,000 $ 342,000

Accounts Receivable 767,000 Nil Inventories 1,606,000 641,000

Land 462,000 107,000

Plant And Equipment - Cost 3,272,000 2,727,000 Accumulated Amortization ( 1,203,000) ( 776,000)

Patent N/A 103,000

Goodwill 372,000 N/A

Total Assets $7,168,000 $3,144,000

Current Liabilities $ 458,000 Nil Bonds Payable - Par 1,507,000 $ 800,000 Bond Payable - Premium 48,000 23,000 Public Common Stock - No Par (250,000 Shares) 2,500,000 N/A Private Common Stock - No Par N/A 1,200,000 Retained Earnings 2,655,000 1,121,000

Total Equities $7,168,000 $3,144,000

Other Information:

1. The stock of Public Ltd. is traded on a national stock exchange. As a consequence, they are required to prepare audited financial statements. Private Inc. is a Canadian controlled private corporation and has never needed audited financial statements. 2. As there has been no need for Private Inc. to comply with generally accepted accounting

principles (GAAP), the Company records revenues and current expenses on a cash basis. After some investigation, it is determined that on January 1, 2009, Private Inc. had unre-corded Accounts Receivable of $220,000 and unreunre-corded Accounts Payable of $273,000. The corresponding balances on December 31, 2009 are $326,000 for Accounts Receivable and $473,000 for Accounts Payable.

3. Public Ltd. records Inventories at lower of cost and market. Private Inc.’s Inventories are carried at cost. On December 31, 2009, the net realizable value of Private Inc.’s Inven-tories was $607,000.

4. On December 31, 2009, the appraised value of Private Inc.’s Land was $93,000. 5. The December 31, 2009 fair value of Private Inc.’s Plant And Equipment is $2,103,000. 6. The Patent on Private Inc.’s books was purchased on January 1, 2004 and is being

amor-tized over what was expected to be its useful life, ten years. However, the process that is covered by the Patent has been replaced by a less costly procedure, and is no longer used by the Company. Private Inc. does not own any other intangible assets.

7. Private Inc.’s Bonds Payable were privately placed with a large insurance company. At current market rates of interest they have a present value of $790,000. However, they can only be retired by paying the insurance company a premium of 10 percent over their par value.

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Required:

A. Provide the journal entries that would be required:

• on December 31, 2009 to record the acquisition,

• on December 31, 2010 if the contingency payment is required, • on December 31, 2010 if the contingency payment is not required.

B. Prepare the December 31, 2009 Balance Sheet for the combined Companies Public Ltd. and its subsidiary, Private Inc.

Assignment Problem Three - 3 (Three Companies, Three Cases)

As at December 31, 2009, the condensed Balance Sheets of Monson Ltd., Barrister Ltd., and Flex Ltd. are as follows:

Monson Ltd. Condensed Balance Sheet

At December 31, 2009

Book Values Fair Values

Current Assets $ 24,200 $ 25,000

Non-Current Assets 186,500 193,200

Total Assets $210,700

Liabilities $ 78,400 $ 75,600

No Par Common Stock (11,000 Shares) 93,500

Retained Earnings 38,800

Total Equities $210,700

Barrister Ltd. Condensed Balance Sheet

At December 31, 2009

Liabilities $ 56,300 $ 58,200

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Flex Ltd.

Condensed Balance Sheet At December 31, 2009

Liabilities $ 62,400 $ 59,800

Total Equities $198,500

The three Companies intend to combine their activities and are considering a variety of approaches. Three possible approaches are as follows:

Approach One Flex Ltd. would borrow $303,000. Using the loan proceeds, Flex Ltd. would pay cash of $160,000 to Monson Ltd. and cash of $143,000 to Barrister Ltd., in return for all of the assets and liabilities of the two Companies. There will be a wind up of the operations of both Monson Ltd. and Barrister Ltd.

Approach Two Barrister Ltd. would borrow $326,000. Using the loan proceeds, Barrister Ltd. would pay cash of $170,000 to the shareholders of Monson Ltd. and cash of $156,000 to the shareholders of Flex Ltd., in return for all of the outstanding shares of these two Companies.

Approach Three Monson Ltd. will issue 11,000 new common shares to Barrister Ltd. and 11,000 new common shares to Flex Ltd. In return, Monson Ltd. will receive all of the assets and liabilities of the two Companies. There would be a wind up of the activities of the two Companies. At this time, the common stock of Monson Ltd. is trading at $13.50 per share. Neither Barrister Ltd. nor Flex Ltd. are given representa-tion on the Monson Ltd. board of directors.

Required: Prepare the December 31, 2009 Balance Sheet for the combined company that would result from each of the three approaches described. Your solutions should be prepared based on the CICA Handbook Recommendations, without regard to any corporate legislation requirements that may be applicable. The joining together of these three companies should be viewed as a single business combination transaction.

Assignment Problem Three - 4 (Complex Business Combination)

The Haggard Corporation Limited (Haggard, hereafter), a federally chartered Canadian company, has concluded negotiations with the Jones Corporation Limited (Jones, hereafter) for the purchase of all of the latter corporation’s assets at fair market value, effective January 1, 2009. Jones Corporation Limited operates a restaurant and a catering business.

An examination at that date by independent experts disclosed that the fair market value of Jones’ inventories was $150,000, and of its machinery and equipment was $160,000. The original cost of the machinery and equipment was $140,000. It was determined that accounts receivable were fairly valued at book value.

Jones held 1,000 of the common shares of Haggard and the fair market value of these shares was $62,000. This value corresponds with the value of Haggard’s common shares in the open market and would be expected to hold for transactions involving a substantially larger number of shares.

The purchase agreement provides that the total purchase price of all assets will be $490,000, payable as follows:

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1. Assumption of the current liabilities of Jones at their book value;

2. Settlement of the Jones debenture debt at its current value in a form acceptable to Jones debenture holders;

3. Haggard shares held by Jones and acquired by Haggard as a result of the transaction would be subsequently returned to Jones at fair market value as part of the consideration;

4. Haggard holds 1,000 shares of Jones and these would be returned to Jones. The value to be ascribed to these shares is 1/10 of the difference between the total purchase price of all assets stated above ($490,000), less the current value of its liabilities. 5. The balance of the purchase consideration was to be entirely in Haggard common

shares, except for a possible fractional share element which would be paid in cash. The Jones debenture holders, who are neither shareholders of Haggard nor Jones, have agreed to accept Haggard bonds in an amount equal to $88,626, the current market value of the bonds. The Haggard bonds carry a 12 percent coupon and trade at par. The face value of each bond is $1,000.

Any amounts assigned to goodwill in this business combination will be deductible for tax purposes as cumulative eligible capital up to a maximum of 75 percent.

Jones, upon conclusion of the agreement, would be wound up. The Balance Sheets of both corporations, as at the date of implementation of the purchase agreement (January 1, 2009), are as follows: Balance Sheets As At January 1, 2009 Haggard Jones Cash $ 100,000 Nil Accounts Receivable 288,000 $112,000 Inventories At Cost 250,000 124,000 Investment In Jones (1,000 Shares) 20,000 N/A Investment In Haggard (1,000 Shares) N/A 40,000 Machinery And Equipment - Net 412,000 100,000

Total Assets $1,070,000 $376,000

Current Liabilities $ 60,000 $ 35,000 7% Debentures - Due December 31, 2011 N/A 100,000 12% Bonds - Due December 31, 2011 500,000 N/A

Premium On Bonds 20,000 N/A

Common Stock (See Note) 200,000 100,000 Retained Earnings 290,000 141,000

Total Equities $1,070,000 $376,000

Note Each company has issued 10,000 shares.

Both corporations have fiscal years that are identical to the calendar year. Required:

A. Prepare Haggard’s pro-forma Balance Sheet as at January 1, 2009.

B. Assume that Jones had a non-capital loss carry forward for tax purposes of $500,000. Should the form of the purchase of Jones differ? Explain your conclusion.