The management of Pratt Engineering Company had agreed in principle to a proposal from Hardin Tool Company to acquire all its stock in exchange for Hardin securities. The two managements were in general agreement that Hardin would issue 100,000 shares of its authorized but unissued stock in exchange for the 40,000 shares of Pratt Common stock. Hardin's investment banking firm had given an opinion that a new public offering of 100,000 shares of Hardin common stock would be made successfully at $8 per share.

Condensed balance sheets for the two companies, projected to the date of the proposed acquisition, and condensed income statements estimated for the separate organizations are given in Exhibit 1. The income statements reflect the best estimate of results of operations if the two firms were not to merge but were to continue to operate as separate companies. There were no intercompany receivables or payables, and no intercompany sales or other transactions were contemplated.

Condensed Balance Sheets As of the Proposed Acquisition Date (thousands of dollars) Hardin Pratt Assets Current Assets $ 432 $ 246 Plant and equipment 690 312 Total assets $1,122 $ 558 Liabilities and Equity Current liabilities $ 263 $ 107 Long-term debt 195 10 Common stock ($1 par) 100 40 Additional paid-in capital 218 94 Retained earnings 346 307 Total liabilities and equity $1,122 $ 558 Condensed Income Statements For the First Year after Combination (thousands of dollars) Sales $2,100 $1,500 Expenses 1,620 1,120 Income 480 380 Income tax expense 168 133 Net income $ 312 $ 247