Question One: Amber Co. is considering the purchase of Bravo Co. Amber has collected the following data about Bravo Bravo Co. Book Estimated Market values OMR Values OMR Total identifiable assets 585,000 750,000 Total liabilities 320,000 320,000 Owners equity 265.000 Cumulative total net cash earnings for the past five years of OMR850,000 includes extraordinary cash gains of OMR67,000 and nonrecurring cash losses of OMR48,000. Amber Co. expects a retum on its investment of 15%. Assume that Amber prefers to use cash eamings rather than accrual-based eamings to estimate its offering price and that it estimates the total valuation of Bravo to be equal to the present value of cash-based earnings (rather than excess earnings) discounted over five years. (Goodwill is then computed as the amount implied by the excess of the total valuation over the identifiable net assets valuation.) Required: 1. Compute (a) an offering price based on the information above that Amber might be willing to pay and (b) the amount of goodwill included in that price. (3 marks) 2. Compute the amount of goodwill actually recorded, assuming the negotiations result in a final purchase price of OMR625,000 cash (1 mark) Total: 4 marks Question Two Condensed balance sheets for Danny Company and Santa Company on January 1, 2020, are as follows: Current assets Plant and equipment (net Total assets Total liabilities Common stock, OMR10 par value Other contributed capital Retained earnings (deficit) Total liabilities and equities Danny OMR 180,000 450.000 630.000 95,000 350,000 125,000 60.000 630 000 Santa OMR 85,000 140,000 225.000 35,000 160,000 53.000 (23.000 225.000 On January 1, 2020, the stockholders of Danny and Santa agreed to a consolidation. It was agreed that Danny was acquiring Santa, Danny agreed to issue 20,000 shares of its OMR10 par stock to acquire all the net assets of Santa at a time when the fair value of Danny's common stock was OMR15 per share, On the date of consolidation, the fair values of Santa's current assets and liabilities were equal to their book values. The fair value of plant and equipment was, however, OMR150,000. Danny will incur OMR20,000 of direct acquisition costs and OMR6,000 in stock issue costs Required: Prepare the journal entries on the books of Danny to record the acquisition of Santa Company's net assets. Total: 6 marks Answer: Question One: Amber Co. is considering the purchase of Bravo Co. Amber has collected the following data about Bravo Bravo Co. Book Estimated Market values OMR Values OMR Total identifiable assets 585,000 750,000 Total liabilities 320,000 320,000 Owners equity 265.000 Cumulative total net cash earnings for the past five years of OMR850,000 includes extraordinary cash gains of OMR67,000 and nonrecurring cash losses of OMR48,000. Amber Co. expects a retum on its investment of 15%. Assume that Amber prefers to use cash eamings rather than accrual-based eamings to estimate its offering price and that it estimates the total valuation of Bravo to be equal to the present value of cash-based earnings (rather than excess earnings) discounted over five years. (Goodwill is then computed as the amount implied by the excess of the total valuation over the identifiable net assets valuation.) Required: 1. Compute (a) an offering price based on the information above that Amber might be willing to pay and (b) the amount of goodwill included in that price. (3 marks) 2. Compute the amount of goodwill actually recorded, assuming the negotiations result in a final purchase price of OMR625,000 cash (1 mark) Total: 4 marks Question Two Condensed balance sheets for Danny Company and Santa Company on January 1, 2020, are as follows: Current assets Plant and equipment (net Total assets Total liabilities Common stock, OMR10 par value Other contributed capital Retained earnings (deficit) Total liabilities and equities Danny OMR 180,000 450.000 630.000 95,000 350,000 125,000 60.000 630 000 Santa OMR 85,000 140,000 225.000 35,000 160,000 53.000 (23.000 225.000 On January 1, 2020, the stockholders of Danny and Santa agreed to a consolidation. It was agreed that Danny was acquiring Santa, Danny agreed to issue 20,000 shares of its OMR10 par stock to acquire all the net assets of Santa at a time when the fair value of Danny's common stock was OMR15 per share, On the date of consolidation, the fair values of Santa's current assets and liabilities were equal to their book values. The fair value of plant and equipment was, however, OMR150,000. Danny will incur OMR20,000 of direct acquisition costs and OMR6,000 in stock issue costs Required: Prepare the journal entries on the books of Danny to record the acquisition of Santa Company's net assets. Total: 6 marks