Practice_Problems_week1_1.pdf - Class Exercises Consolidation of Financial Information Problem 1 Alpha acquired 100 of Beta’s common shares on paying

Practice_Problems_week1_1.pdf - Class Exercises...

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Class Exercises - Consolidation of Financial Information Problem 1 Alpha acquired 100% of Beta s common shares on December 31, 2017 paying $2,500,000 in cash, issuing 3,500,000 in debt and issuing 100,000 new common shares to Bet a’ s shareholders. The market value of each Alpha share is $24. The par value of Alpha s shares is $6. Beta is a provider of data networking products and services in Canada and Mexico. As a result of the acquisition, the company will be the leading provider of such products and services in Canada and Mexico. The company expects to achieve significant synergies and cost reductions by eliminating redundant processes and facilities. Alpha s and Bet a’ s balance sheets as of December 31, 2017 ( prior to the acquisition date) were as follows: Alpha Book Values Beta Book Values Cash $3,000,000 $0 Accounts Receivable, net $1,950,000 $1,150,000 Inventory $2,500,000 $1,400,000 PPE $3,425,000 $1,400,000 Intangible Assets $5,250,000 $2,500,000 Total Assets $16,125,000 $6,450,000 Current Liabilities ($1,125,000) ($450,000) Long Term Debt ($3,000,000) ($1,200,000) Common Stock ($1,375,000) ($550,000) Additional Paid-in Capital ($3,375,000) ($1,350,000) Retained Earnings 1/1/2017 ($5,250,000) ($2,100,000) Revenues ($3,000,000) ($1,200,000) Expenses $1,000,000 $400,000 Total Liabilities and equity ($16,125,000) ($6,450,000) Retained Earnings 12/31/2017 ($7,250,000) ($2,900,000) The contingent consideration arrangement requires that Alpha pay $2,000,000 of additional consideration to Beta s former shareholders, if Beta s revenues increase by a compound annual growth rate of 30% over a three-year period. The present value of the contingent consideration arrangement at the acquisition date was $1,000,000. Alpha estimated the present value of the contingent consideration using a probability- weighted discounted cash flow model. This present value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820.
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In determining its offer, Alpha noted the following with respect to Beta s assets and liability: The fair value of Accounts Receivable acquired is $1,300,000. Inventory is overvalued by $300,000, i.e. the fair value for Beta s inventory is lower than its book value.
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  • Spring '14
  • Balance Sheet, Generally Accepted Accounting Principles, Alpha, par value of Alpha

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