Comprehensive: Acquisition of Assets for Cash PBX Company acquired all the assets of Sprint Company by assuming responsibility for all of its liabilities and paying $1,500,000 cash. Informa¬

tion with respect to Sprint at the date of combination follows:

ired 1. Does the acquisition appear to be a horizontal, vertical, or conglomerate type of combination?
2. Would the transaction be accounted for as a purchase or a pooling of interests^
3. Is PBX Company the parent company of Sprint Company? Why or why not?
4. Is Sprint Company a subsidiary^ Why or why not?
5. Is Sprint Company a legal entity after the transaction has been consummated?
6. How should the newly acquired operation be referred to?
7. Prepare the journal entry that Sprint Company makes on the date of the combination. Assume a 40% income tax rate.
8. Prepare a balance sheet for Sprint Company after recording the entry in requirement 7.
9. What options are available to Sprint Company after the business combination?
10. What is Sprint’s book value in total and per share after the business combination?
11. What is the most likely market price of Sprint Company’s common stock immediately after the transaction? (How would your answer change if Sprint planned to liquidate and distribute cash to its stockholders one year from now?)
12. Prepare the entry — in condensed form — that PBX would make, assuming that it uses central¬
ized accounting.
13. Why did PBX pay $1,500,000 for a company whose net assets are worth only $1,300,000?
14. How could PBX have determined the current value of Sprint’s assets and liabilities?
15. Tax questions based on the Appendix (optional);

a. What is the treatment for tax-reporting purposes?

b. From your answer in requirement 15a, what is PBX’s tax basis of the land, buildings, and equipment it obtained?