Question
Prince Corporation acquires Squire Service Corporation for 1 million shares of Prince stock, valued at $30 per share. Squire is merged into Prince, although it
Prince Corporation acquires Squire Service Corporation for 1 million shares of Prince stock, valued at $30 per share. Squire is merged into Prince, although it continues to do business under the Squire Service name. Professional fees connected with the acquisition are $900,000 and costs of registering and issuing the new shares are $400,000, both paid in cash. Squire performs vehicle maintenance services for owners of auto, truck and bus fleets. Squire's balance sheet at acquisition is as follows:
Cash | $200,000 | Current liabilities | $2,900,000 |
Accounts receivable | 2,500,000 | Long-term liabilities | 8,600,000 |
Parts inventory | 5,200,000 | Stockholders' equity | 13,200,000 |
Equipment | 16,800,000 | ||
Total assets | $24,700,000 | Total liabilities and equity | $24,700,000 |
In reviewing Squire's assets and liabilities, you determine the following:
On a discounted present value basis, the accounts receivable have a fair value of $2,300,000, and the long-term liabilities have a fair value of $8,000,000.
The current replacement cost of the parts inventory is $6,000,000.
The current replacement cost of the equipment is $18,500,000.
Squire occupies its service facilities under an operating lease with ten years remaining. The rent is below current market levels, giving the lease an estimated fair value of $1,250,000.
Squire has long-term service contracts with several large fleet owners. These contracts have been profitable; the present value of expected profits over the remaining term of the contracts is estimated at $1,000,000.
Squire has a skilled and experienced work force. You estimate that the cost to hire and train replacements would be $750,000.
Squire's trade name is well-known among fleet owners and is estimated to have a fair value of $200,000.
(a) Calculate the amount of goodwill that Prince records for the acquisition. $Answer (b) Prepare Prince's journal entry or entries to record the merger with Squire.
General Journal | ||
---|---|---|
Description | Debit | Credit |
Cash | Answer | Answer |
Accounts receivable | Answer | Answer |
Parts inventory | Answer | Answer |
Equipment | Answer | Answer |
Intangible: Lease | Answer | Answer |
Intangible: Service contracts | Answer | Answer |
Intangible: Trade name | Answer | Answer |
Goodwill | Answer | Answer |
AnswerMerger expensesCashContingent consideration liabilityGain on purchase | Answer | Answer |
AnswerMerger expensesCashContingent consideration liabilityGain on purchase | Answer | Answer |
Current liabilities | Answer | Answer |
Long-term liabilities | Answer | Answer |
Capital stock | Answer | Answer |
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