5/20/2020 Chapter 3 In-class demonstration

1. Award: 10.00 points Problems? Adjust credit for all students.

Myers Company Ltd. was formed 10 years ago by the issuance of 24,000 common shares to three shareholders. Four years later, the
company went public and issued an additional 30,000 common shares.

The management of Myers is considering a takeover in which Myers would purchase all of the assets and assume all of the liabilities of
Norris Inc. Two alternative proposals are being considered:

PROPOSAL 1
Myers would offer to pay $426,400 cash for the Norris net assets. In addition, Myers would incur legal, appraisal, and finders’ fees for a total
cost of $5,200.

PROPOSAL 2
Myers would issue 52,000 shares currently trading at $8.20 each for the Norris net assets. Other costs associated with the takeover would
be as follows:

Legal, appraisal, and finders’ fees $ 5,200

Costs of issuing shares 7,200
$12,400

Norris shareholders would be offered five seats on the 10-member board of directors of Myers, and the management of Norris would be
absorbed into the surviving company.

Balance sheet data for the two companies prior to the combination are as follows:

Myers Norris
Carrying Carrying Fair
Amount Amount Value
Cash $ 532,000 $ 54,500 $ 54,500
Accounts receivable 169,200 63,450 58,200
Inventory 376,120 112,110 136,220
Land 467,000 77,000 212,000
Buildings (net) 252,505 23,020 26,020
Equipment (net) 80,945 19,705 17,945
$1,877,770 $349,785
Current liabilities $ 135,335 $ 43,115 43,115
Non-current liabilities 430,000 152,000 157,000

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Common shares 502,000 102,000
Retained earnings 810,435 52,670
$1,877,770 $349,785

Required:
(a) Prepare the journal entries of Myers for each of the two proposals being considered. (If no entry is required for a transaction/event,
select "No Journal Entry Required" in the first account field.)

Proposal 1

No Transaction General Journal Debit Credit

A 1 Cash 54,500
Accounts receivable 58,200
Inventory 136,220
Land 212,000
Buildings 26,020
Equipment 17,945
Goodwill 121,630
Current liabilities 43,115
Non-current liabilities 157,000
Cash 426,400

B 2 Professional fees expense 5,200

Cash 5,200

Proposal 2

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No Transaction General Journal Debit Credit

A 1 Cash 54,500
Accounts receivable 58,200
Inventory 136,220
Land 212,000
Buildings 26,020
Equipment 17,945
Goodwill 121,630
Current liabilities 43,115
Non-current liabilities 157,000
Common shares 426,400

B 2 Professional fees expense 5,200

Common shares 7,200
Cash 12,400

(b) Prepare the balance sheet of Myers after the takeover for each of the proposals being considered.

Proposal 1

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Myers Company
Balance Sheet
Assets
Cash $ 154,900
Accounts receivable 227,400
Inventory 512,340
Land 679,000
Buildings (net) 278,525
Equipment (net) 98,890
Goodwill 121,630

F
$ 2,072,685
Liabilities and Equity
Current liabilities $ 178,450
Noncurrent liabilities 587,000
Common shares 502,000
Retained earnings 805,235

F
$ 2,072,685

Proposal 2

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Myers Company
Balance Sheet
Assets
Cash $ 574,100
Accounts receivable 227,400
Inventory 512,340
Land 679,000
Building (net) 278,525
Equipment (net) 98,890
Goodwill 121,630

F
$ 2,491,885
Liabilities and Equity
Current liabilities $ 178,450
Noncurrent liabilities 587,000
Common shares 921,200
Retained earnings 805,235

F
$ 2,491,885

Explanation:

(a)
Proposal 1

Acquisition cost $426,400

Fair value of net assets 304,770
Goodwill $121,630

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Proposal 2
Under IFRS 3, an acquirer must be identified in the transaction. Myers’ shareholders will own 51% of the outstanding shares post transaction
(54,000/(54,000 + 52,000)) and Norris’ shareholders will own 49% (52,000/(54,000 + 52,000)). Therefore, Myers is the acquirer.

Acquisition cost 52,000 shares @ $8.20 $426,400

Fair value of net assets 304,770
Goodwill $121,630

(b)
Proposal 1
Cash ($532,000 + $54,500 − $426,400 − $5,200) = $154,900
Accounts receivable ($169,200 + $58,200) = $227,400
Inventory ($376,120 + $136,220) = $512,340
Land ($467,000 + $212,000) = $679,000
Buildings (net) ($252,505 + $26,020) = $278,525
Equipment (net) ($80,945 + $17,945) = $98,890

Current liabilities ($135,335 + $43,115) = $178,450

Non-current liabilities ($430,000 + $157,000) = $587,000
Retained earnings ($810,435 − $5,200) = $805,235

Proposal 2
Cash ($532,000 + $54,500 − $12,400) = $574,100
Accounts receivable ($169,200 + $58,200) = $227,400
Inventory ($376,120 + $136,220) = $512,340
Land ($467,000 + $212,000) = $679,000
Building (net) ($252,505 + $26,020) = $278,525
Equipment (net) ($80,945 + $17,945) = $98,890

Current liabilities ($135,335 + $43,115) = $178,450

Non-current liabilities ($430,000 + $157,000) = $587,000
Common shares ($502,000 + $426,400 − $7,200) = $921,200
Retained earnings ($810,435 − $5,200) = $805,235

References

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Worksheet Learning Objective: 03-03

Apply the acquisition method
to a purchase-of-net-assets
business combination.

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