Problem 2-5

Balance sheets for Salt Company and Pepper Company on December 31, 2013, follow:

		Salt		Pepper
ASSETS
Cash		$88,130		$188,950
Receivables		112,610		252,920
Inventories		129,250		253,773
Plant assets		697,800		1,251,030
Total assets		$1,027,790		$1,946,673
EQUITIES
Accounts payable		$183,250		$236,177
Mortgage payable		138,350		168,050
Common stock, $20 par value		317,360		811,400
Other contributed capital		172,530		283,720
Retained earnings		216,300		447,326
Total equities		$1,027,790		$1,946,673

Pepper Company tentatively plans to issue 27,000 shares of its $20 par value stock, which has a current market value of $41 per share net of commissions and other issue costs. Pepper Company then plans to acquire the assets and assume the liabilities of Salt Company for a cash payment of $830,900 and $290,600 in long-term 8% notes payable. Pepper Companys receivables include $58,680 owed by Salt Company. Pepper Company is willing to pay more than the book value of Salt Company assets because plant assets are undervalued by $227,250 and Salt Company has historically earned above-normal profits. Prepare a pro forma balance sheet showing the effects of these planned transactions.

PEPPER COMPANY Pro Forma Balance Sheet Giving Effect to Proposed Issue of Common Stock and Note Payable for All of the Common Stock of Salt Company under Purchase Accounting December 31, 2013 Audited Pro Forma Balance Sheet Adjustments Balance Sheet Cash Receivables Inventories Plant Assets Goodwill Total Assets Accounts Payable Notes Payable, 8% Mortgage Payable Common Stock, $20 par Additional Paid-in Capital Retained Earning:s $188,950 252,920 253,773 1,251,030 0 1,946,673 236,177 0 168,050 811,400 283,720 447,326 1,946,673 Total Liabilities and Equity