Accounting - Excerise 2-2

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EXERCISE 2-2 Acquisition Method The balance sheets of Petrello Company and Sanchez Company as of January 1, 2011, are presented below. On that date, after an extended period of negotiation, the two companies agreed to merge. To effect the merger, Petrello Company is to exchange its unissued common stock for all the outstanding shares of Sanchez Company in the ratio of ½ share of Petrello for each share of Sanchez. Market values of the shares were agreed on as Petrello, $48; Sanchez, $24. The fair values of Sanchez Company’s assets and liabilities are equal to their book values with the exception of plant and equipment, which has an estimated fair value of $720,000. Petrello Sanchez Cash $ 480,000 $ 200,000 Receivables 480,000 240,000 Inventories 2,000,000 240,000 Plant and equipment (net) 3,840,000 800,000 Total assets $6,800,000 $1,480,000 Liabilities $1,200,000 $ 320,000 Common stock, $16 par value 3,440,000 800,000 Other contributed capital 400,000 —0— Retained earnings 1,760,000 360,000 Total equities $6,800,000 $1,480,000 Prepare a balance sheet for Petrello Company immediately after the merger.

Cash$680,000
Receivables720,000
Inventories2,240,000
Plant and Equipment (net) ($3,840,000 + $720,000)4,560,000 Goodwill 120,000
Total Assets$8,320,000

Liabilities1,520,000
Common Stock, $16 par ($3,440,000 + (.50  $800,000))3,840,000 Other Contributed Capital ($400,000 + $800,000)1,200,000
Retained Earnings 1,760,000
Total Equities$8,320,000

Entries on Petrello Company’s books would be:

Cash200,000
Receivables240,000
Inventory240,000
Plant and Equipment720,000
Goodwill *120,000
Liabilities320,000
Common Stock (25,000  $16)400,000
Other Contributed Capital ($48 - $16)  25,000800,000

* ($48  25,000) – [($1,480,000 – ($800,000 –...
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