Market value p.s.
Book value p.s.
The transaction is cash based with a merger premium of $5 p.s.
If no firm has debt then use the purchase method to construct the balance sheet of the
Since neither company has any debt, using the pooling method, the asset value of the
combined must equal the value of the equity, so:
Assets = Equity = 25,000($20) + 15,000($7) = $605,000
With the purchase accounting method, the assets of the combined firm=
book value of Firm X,
the market value of Firm Y,
Assets from X = 25,000($20) = $500,000 (book value)
Assets from Y = 15,000($18) = $270,000 (market value)
The purchase price of Firm Y is the number of shares outstanding times the
sum of the current stock price per share plus the premium per share, so:
Purchase price of Y = 15,000($18 + 5) = $345,000
The goodwill created will be:
Goodwill = $345,000 – 270,000 = $75,000
And the total asset of the combined company will be:
Total assets XY = Total equity XY = $500,000 + 270,000 + 75,000 = $845,000