Hardy acquired 100 percent of the common shares of Adam for $117. Hardy financed the transaction with the issuance of debt. Ron has been asked by his supervisor, Nadine Lee, CFA, to analyze specific account balances. Unless otherwise noted, U.S. GAAP applies to this transaction. Hardy Adam Cash and accounts receivable 185 60 Inventory 40 30 Property, plant, and equipment (PP&E) 250 105 Goodwill 0 15 Total assets 475 210 Accounts payable 90 50 Long-term debt 200 100 Common stock 100 50 Retained earnings 85 10 Total liabilities & shareholders’ equity 475 210 Other information to consider: 1. The fair market value (FMV) at 3/31/06 of Adam’s inventory is $35. 2. There are inter-company sales between Hardy and Adam. $20 remains as a receivable to Adam and a payable to Hardy at 3/31/06. 3. The FMV of Adam’s PP&E is $150 at 3/31/06. 4. The FMV of in-process R&D is $15 at 3/31/06 (book value of zero). 5. The FMV increment of long-term debt is $10 at 3/31/06 and results because the yield on the bond is less than the coupon rate. The remaining term of the debt is 10 years. the consolidated balance sheet amounts for common stock and long-term debt, respectively, are closest to: Common Stock Long-Term Debt A. $150 $397 B. $100 $397 C. $150 $427 D. $100 $427 the consolidated balance sheet amounts for total assets and goodwill, respectively, are closest to: Total Assets Goodwill A. $717 $0 B. $732 $0 C. $717 $17 D. $732 $17
d a guess,
I’d go D and A here also, but on the 2nd one- so you have 685 if you add the 2 total assets together. i was thinking + 5 inventory adjust -20 taking out the intercorporates +45 on the FMV of PP&E… that’d get me to 715 where’s my $2? I WANT MY 2 DOLLARS!!! i’ll still guess A b/c the other answer is +17 (prob the goodwill which i want to say we as solid analysts will not include) 1 more question here- on the 15 goodwill for the co being bought- do we keep that there b/c it says that there is a good FMV of it at 15 so it’s identifiable? where am i going wrong on the adjustments?
edit- so what if i took out the 15 R&D, that gets me to 700 for assets. does it say somewhere that i’m missing that this co was bought at 117 but worth 100? if so, then i guess you could add the 17 GW as an asset to get the 717 but then i’d want to say it is 17 GW and answer is C? i can’t make the #'s work any other way. hook a sis up- i’m about to go to bed- what’s the answer?
The correct answer is D, C Banny for the second one its because there is goodwill that is added from the acquisition and the previous goodwill is removed. So that is where the extra missing 2 is and the goodwill will be 17 because of the acquisition. I had a question about the first one - how do you get common shares of 100? I was getting 150, why do you remove the common shares of the acquired company?
btw, are questions like these considered tough FSA? I’m having a hard time with these FSA ques :-/
Can you throw up the calculations please?
D and D
The solution Below is the consolidated balance sheet Hardy Adam Adjustments Consolidated Cash and accounts receivable (Note 2) 185 60 –20 225 Inventory (Note 3) 40 30 +5 75 Property, plant, and equipment (Note 4) 250 105 +45 400 In-process R&D (Note 5) 0 0 +15, –15 0 Goodwill (Note 6) 0 15 –15, +17 17 Total assets 475 210 717 Accounts payable (Note 2) 90 50 –20 120 Long-term debt (Note 7) 200 100 +10, +117 427 Common stock (Note 8) 100 50 –50 100 Retained earnings (Note 9) 85 10 –10, –15 70 Total liabilities & shareholders’ equity 475 210 717 Allocation to intangible assets = purchase price less net tangible assets at FMV = 117 – (40 + 35 + 150 – 30 – 110) = 32. In-process R&D is an intangible asset, and it is allocated $15, equal to its FMV. Under U.S. GAAP, however, in-process R&D is written off immediately upon consolidation. The goodwill of Adam is considered worthless because Adam no longer exists as an entity of its own. The goodwill created upon consolidation is equal to allocation to intangible assets – allocation to in-process R&D = 32 – 15 = 17. Under U.S. GAAP, goodwill is not amortized over a specific period of time, but rather subject to an annual impairment test.
boom boom shake the room- this is actually a really good question. so for me to get the intangibles on an acquisition, i take the FMV of my net tangible assets and compare it to my buy price. nice. that was the missing link. normally they just give you what the goodwill is- this you have to back into.