The following information was obtained by the accounting department in order to prepare the pro-forma financial statements for the Board of Directors. Amounts below are actuals or based on management's best estimate of the transaction details. (all amounts in thousands, unless stated otherwise) Balance Sheet December 31, 2019 Assets Paddle-up Stream Cash and receivables $ 2,860 $ 720 Inventory 1,700 900 Equity method investments 300 Investment in Sub Land 650 175 Buildings and equipment, net 2,400 600 Total assets $ 7,610$ 2,695 Liabilities & Equity Current liabilities 1,500 1,000 Long-term debt 2,000 400 Common stock, par value 500 100 Additional paid-in capital 1,200 350 Retained earnings 2,410 845 Total liabilities & equity S 7,610$ 2,695 Additional Information a) Paddle-up Co expects to pay $1.7 million in cash for the acquistion of Stream Co. Legal and accounting fees are estimated to be $150K b) The fair values of Stream Co's reported net assets are assumed to equal their book values with the exception of the following assets: Stream Co Estimated Fair Value Inventory $800 Equity Method investments 250 Land 420 Buildings & equipment, net 900 C) Inventory and Equity method investments are expected to be sold in 2020. d) Buildings and equipment: 20 year useful life; straight-line depreciation e) During due dilligence, management identified the following unrecorded intangible assets (estimated fair values shown below): -Assembled workforce $300 -Business reputation of Stream Co. 500 -Potential contracts with Oar Inc. 150 -Prime retail location of Stream Co. shops 100 Stream Co. Customer list See below f) Paddle-up management reqeusted assistance from the accounting department in order to value the customer list intangible given the amount of assumptions that needed to be considered and their unfamiliarity with the income approach'. The following information was obtained from Stream Company's management: -Projected revenue related to this intangible for 2020; 1,000 -Projected annual revenue growth 5% -Cost of sales and operating expenses are estimated as % of revenue 80% -The effective income tax rate for the company 25% -Average remaining useful life of the asset; straight line depreciation 5 years -The appropriate risk adjusted discount rate 24% -Depreciation expense included in operating expenses for 2020 9 -Depreciation expense is projected to increase in line with revenue growth 9) Additional management estimates related to the customer list intangible: 2020 2021 2022 Projected additional capital expenditures 50 50 51 Capital charge on use of contributory assets 60 60 60 The accounting department should complete the following steps in order to prepare the pro-forma consolidated balance sheet. Again, management will be using the stock acquisition method of accounting. a. Calculate the valuation of the intangible using the income approach method. (Round to nearest thousand) 10 points Revenue Operating Expenses Projected Operating income Income tax expense After-tax operating income Depreciation expense Capital expenditures Contributory assets capital charge Net cash flow Present value of net cash flows 2020 1,000 800 200 50 150 9 50 60 49 40 2021 1,050 840 210 53 158 9 50 60 57 37 2022 1,103 882 221 55 165 10 51 60 64 34 Total 110 b. Prepare a schedule computing the goodwill / gain on acquisition. 10 points $ 1,700 (1,295) 405 Acquisition cost Book value Excess of acquisition cost over book value Excess of fair value over book value: Inventory $ Equity method investments Land Buildings & equipment Stream Co. Customer list (100) (50) 245 300 110 Goodwill / Gain on Acquisition 505 S 100 Good Job! c. Next, record Paddle-up's entry to record the acquisition. 10 points Description Debit Credit d. Prepare a working paper to consolidate the balance sheets of Paddle-up and Stream at January 1, 2020 (assuming the acquisition took place on the first of the year). Use the drop-down list to select either "E" or "R" for 10 points Accounts Taken from the elimination entry Books Eliminations Consolidated Paddle-up Stream Balances Use the drop-down list to select either "E" or Balance sheet accounts Dr (Cr) Dr (Cr) Dr Cr Dr (Cr) "R" for the elimination $ $ entry Total $ Good Job! $ Good Job! S Good Job Good Job s Good Job! e. Please enter the working paper eliminating entries below: 10 points Equity Entry Debit Credit E Good Job! Revalue Entry Debit Credit R **********************RRRRRRR Good lobi f. Finally, present the pro-forma consolidated balance sheet at the date of acquisition. 10 points Paddle-up Corporation and Subsidiary Pro-Forma Consolidated Balance Sheet Date of acquisition Assets $ Total assets S Liabilities s Total liabilities Stockholders' equity Total equity Total liabilities and equity $ Good Job! The following information was obtained by the accounting department in order to prepare the pro-forma financial statements for the Board of Directors. Amounts below are actuals or based on management's best estimate of the transaction details. (all amounts in thousands, unless stated otherwise) Balance Sheet December 31, 2019 Assets Paddle-up Stream Cash and receivables $ 2,860 $ 720 Inventory 1,700 900 Equity method investments 300 Investment in Sub Land 650 175 Buildings and equipment, net 2,400 600 Total assets $ 7,610$ 2,695 Liabilities & Equity Current liabilities 1,500 1,000 Long-term debt 2,000 400 Common stock, par value 500 100 Additional paid-in capital 1,200 350 Retained earnings 2,410 845 Total liabilities & equity S 7,610$ 2,695 Additional Information a) Paddle-up Co expects to pay $1.7 million in cash for the acquistion of Stream Co. Legal and accounting fees are estimated to be $150K b) The fair values of Stream Co's reported net assets are assumed to equal their book values with the exception of the following assets: Stream Co Estimated Fair Value Inventory $800 Equity Method investments 250 Land 420 Buildings & equipment, net 900 C) Inventory and Equity method investments are expected to be sold in 2020. d) Buildings and equipment: 20 year useful life; straight-line depreciation e) During due dilligence, management identified the following unrecorded intangible assets (estimated fair values shown below): -Assembled workforce $300 -Business reputation of Stream Co. 500 -Potential contracts with Oar Inc. 150 -Prime retail location of Stream Co. shops 100 Stream Co. Customer list See below f) Paddle-up management reqeusted assistance from the accounting department in order to value the customer list intangible given the amount of assumptions that needed to be considered and their unfamiliarity with the income approach'. The following information was obtained from Stream Company's management: -Projected revenue related to this intangible for 2020; 1,000 -Projected annual revenue growth 5% -Cost of sales and operating expenses are estimated as % of revenue 80% -The effective income tax rate for the company 25% -Average remaining useful life of the asset; straight line depreciation 5 years -The appropriate risk adjusted discount rate 24% -Depreciation expense included in operating expenses for 2020 9 -Depreciation expense is projected to increase in line with revenue growth 9) Additional management estimates related to the customer list intangible: 2020 2021 2022 Projected additional capital expenditures 50 50 51 Capital charge on use of contributory assets 60 60 60 The accounting department should complete the following steps in order to prepare the pro-forma consolidated balance sheet. Again, management will be using the stock acquisition method of accounting. a. Calculate the valuation of the intangible using the income approach method. (Round to nearest thousand) 10 points Revenue Operating Expenses Projected Operating income Income tax expense After-tax operating income Depreciation expense Capital expenditures Contributory assets capital charge Net cash flow Present value of net cash flows 2020 1,000 800 200 50 150 9 50 60 49 40 2021 1,050 840 210 53 158 9 50 60 57 37 2022 1,103 882 221 55 165 10 51 60 64 34 Total 110 b. Prepare a schedule computing the goodwill / gain on acquisition. 10 points $ 1,700 (1,295) 405 Acquisition cost Book value Excess of acquisition cost over book value Excess of fair value over book value: Inventory $ Equity method investments Land Buildings & equipment Stream Co. Customer list (100) (50) 245 300 110 Goodwill / Gain on Acquisition 505 S 100 Good Job! c. Next, record Paddle-up's entry to record the acquisition. 10 points Description Debit Credit d. Prepare a working paper to consolidate the balance sheets of Paddle-up and Stream at January 1, 2020 (assuming the acquisition took place on the first of the year). Use the drop-down list to select either "E" or "R" for 10 points Accounts Taken from the elimination entry Books Eliminations Consolidated Paddle-up Stream Balances Use the drop-down list to select either "E" or Balance sheet accounts Dr (Cr) Dr (Cr) Dr Cr Dr (Cr) "R" for the elimination $ $ entry Total $ Good Job! $ Good Job! S Good Job Good Job s Good Job! e. Please enter the working paper eliminating entries below: 10 points Equity Entry Debit Credit E Good Job! Revalue Entry Debit Credit R **********************RRRRRRR Good lobi f. Finally, present the pro-forma consolidated balance sheet at the date of acquisition. 10 points Paddle-up Corporation and Subsidiary Pro-Forma Consolidated Balance Sheet Date of acquisition Assets $ Total assets S Liabilities s Total liabilities Stockholders' equity Total equity Total liabilities and equity $ Good Job
