Holton Chairs had been an innovative designer and producer of quality office chairs

since Arnold Holton founded the firm in Grand Rapids, Michigan, in $1938.$ In $1947,$

Holton purchased Central Chairs and renamed itself Holton$-$Central Inc. When

Mr$.$ Holton died in $1994,$ long$-$time executives managed the firm for his heirs. Through

a variety of circumstances, including foreign competition, outdated production

equipment and processes, expensive wage contracts, and low quality, Holton$-$

Central gradually became unprofitable. In early $2009,$ Holton$-$Central Inc., declared

bankruptcy and closed its doors. Because of concerns about chemical contaminants

at Holton$-$Central's original factory $($no longer IN use$),$ no one would buy the corporation

as a going concern. Instead, one bidder offered to buy Holton$-$Central's assets, except

for the original factory, and resume operations at the current production facility under

the Holton$-$Central name.

That bidder, Belmont Office Furniture, produced high$-$quality office desks. Peter

Cardell purchased Belmont Office Furniture's assets out of bankruptcy in $2003$;

within four years he increased revenues by $65\%$ and returned Belmont to profitability.

By $2009,$ Mr$.$ Cardell decided to acquire another office furniture company. On July $1,$

$2009,$ the Holton$-$Central bankruptcy judge accepted Belmont's $$4,765,000$ offer for

Holton$-$Central's assets and accounts payable. The $$4,765,000$ purchase price equaled

the market value of the tangible assets, minus $$875,000$ of accounts payable, plus

$$265,000,$ which Mr$.$ Cardell considered goodwill:

Raw material inventory

Work$-$in$-$process inventory

Finished goods inventory

Equipment $(5-$year life$)$

Building $(20-$year life$)$

Land

Total tangible assets

Less: Accounts payable

Net tangible assets

Goodwill

Total purchase price

$$175,000$

$$220,000$

$$115,000$

$$3,600,000$

$$815,000$

$$5,375,000$

$$875,000$

$$4,500,000$

$$265,000$

$$4,765,000$

On July $1,2009,$ the acquisition was completed as follows:

Belmont Office Furniture formed Holton$-$Central Holdings and paid $$3\mathrm{.}9$ million

for all $3,900,000$ shares of Holton$-$Central Holdings $$\mathrm{.}01$ par value common stock.

Holton$-$Central Holdings borrowed $$6,000,000$ to help Holton$-$Central exit from

bankruptcy; the principal would be repaid in six $$1$ million payments each July $1,$

Holton$-$Central Holdings paid $$4,765,000$ cash for the assets of Holton$-$Central

Inc., and assumed the firm's $$875,000$ of accounts payable.

July $2,2009-$December $31,2009$

Mr$.$ Cardell's first action was to close four furniture showrooms in Chicago, Los

Angeles, New York, and Atlanta, because the leases had been cancelled in

bankruptcy. These closures would save $$950,000$ annually; Mr$.$ Cardell believed sales

would decline only marginally. He also negotiated a more favorable labor contract

with former employees, which would save another $$750,000$ annually. On July $2,$

$2009,$ the from reopened for business. The following is a summary of Holton$-$Central's

activity for the second half of $2009$ :

Paid the $$875,000$ of accounts payable.

Paid $$154,500$ for utilities, professional services, and other administrative

expenses.

Paid $$1,408,000$ for office wages and related payroll taxes and benefits.

Paid $$2,785,000$ for selling and marketing expenses.

Paid $$900,000$ for production machinery. The machinery was purchased October $1,$

The machinery had a useful life of five years with no salvage value.

Paid $$228,000$ for various one$-$year insurance policies.

Purchased $$5,345,000$ of raw material; $$835,000$ was unpaid as of December $31,1989$

Manufacturing records showed $$4,935,000$ of raw material transferred to work in

process.

Paid $$7,878,000$ in cash for production wages and charged the costs to work$-$in$-$

process inventory.

Charged $$6,662,000$ to work$-$in$-$process inventory for manufacturing overhead

items, including $$6,400,000$ paid in cash and $$262,000$ for depreciation on

manufacturing facilities.