Tesla announced on August 1, 2016, its intent to buy

Tesla announced on August 1, 2016, its intent to buy SolarCity in a deal expected to exceed $2.5 billion dollars. Tesla touted the acquisition because of $150 million in expected cost synergies in the first year. In addition, the new company would be the world’s largest vertically integrated energy company (the company would be able to sell electric cars, make and sell energy storage for buildings and the grid, and make and install solar panels). SolarCity’s expertise in installing solar panels could bolster installations of Tesla’s Powerwalls (Tesla rechargeable Lithium-ion batteries used for domestic consumption). The acquisition is expected to be dilutive to EPS. Further, the combined debt of the two companies would be $6 billion, despite adding $1 billion in revenue to the combined company.

Financial statements for both companies at the end of 2016 are presented below. The acquisition did occur on November 21, 2016. The results for Tesla reported below do include the results of operations for SolarCity from the date of acquisition to the end of the current year (November 21 to December 31, 2016).

(1) What does it mean for an acquisition to be dilutive? Why would shareholders vote to approve the acquisition if the acquisition is expected to be dilutive? Why would management prefer the acquisition if it is dilutive?

(2) Provide comments concerning the performance of both companies. Why is it difficult to predict the success of the acquisition?

Assume the same information as in Exercise 2-5 except that

Assume the same information as in Exercise 2-5 except that instead of paying a cash earnout, Pritano Company agreed to issue 10,000 additional shares of its $10 to the stockholders of Succo if the average postcombination earnings over the next three years equaled or exceeded $2,500,000. The fair value of the contingent consideration on the date of acquisition was estimated to be $200,000. The contingent consideration (earnout) was classified as equity rather than as a liability.

Required:

A. Prepare the journal entries on the books of Pritano to record the acquisition on December 31, 2018.

B. On January 1, 2022, the additional 10,000 shares of Pritano’s stock were issued because the earnout targets were met. On this date, Pritano’s stock price was $50 per share. Prepare the journal entry to record the issuance of the shares of stock.

Pritano Company acquired all the net assets of Succo Company

Pritano Company acquired all the net assets of Succo Company on December 31, 2018, for $2,160,000 cash. The of Succo Company immediately prior to the acquisition showed:

As part of the negotiations, Pritano agreed to pay the stockholders of Succo $360,000 cash if the post-combination earnings of Pritano averaged $2,160,000 or more per year over the next two years. The estimated fair value of the contingent consideration was $144,000 on the date of the acquisition.

Required:

A. Prepare the journal entries on the books of Pritano to record the acquisition on December 31, 2018.

B. At the end of 2019, the estimated fair value of the contingent consideration increased to $200,000. Prepare the journal entry to record the change in the fair value of the contingent consideration, if needed.

C. In 2020, the earnings did not meet the earnout target and the estimated fair value of the contingent consideration was zero. Prepare the journal entry to record the change in the fair value of the contingent consideration.

Plantation Homes Company is considering the acquisition of Condominiums, Inc.

Plantation Homes Company is considering the acquisition of Condominiums, Inc. early in 2020. To assess the amount it might be willing to pay, Plantation Homes makes the following computations and assumptions.

A. Condominiums, Inc. has identifiable assets with a total fair value of $15,000,000 and liabilities of $8,800,000. The assets include office equipment with a fair value approximating book value, buildings with a fair value 30% higher than book value, and land with a fair value 75% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Condominiums, Inc.

B. Condominiums, Inc.’s pretax incomes for the years 2017 through 2019 were $1,200,000, $1,500,000, and $950,000, respectively. Plantation Homes believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. However, it may need to consider adjustments to the following items included in pretax earnings:

Depreciation on buildings (each year)……………………………960,000
Depreciation on equipment (each year)…………………………..50,000
Extraordinary loss (year 2019)……………………………………….300,000
Sales commissions (each year)………………………………………250,000

C. The normal rate of return on net assets for the industry is 15%.

Required:

A. Assume further that Plantation Homes feels that it must earn a 25% return on its investment and that is determined by capitalizing excess earnings. Based on these assumptions, calculate a reasonable offering price for Condominiums, Inc. Indicate how much of the price consists of . Ignore tax effects.

B. Assume that Plantation Homes feels that it must earn a 15% return on its investment, but that average excess earnings are to be capitalized for three years only. Based on these assumptions, calculate a reasonable offering price for Condominiums, Inc. Indicate how much of the price consists of . Ignore tax effects.

Stockholders of Acme Company, Baltic Company, and Colt Company are

Stockholders of Acme Company, Baltic Company, and Colt Company are considering alternative arrangements for a business combination. Balance sheets and the fair values of each company’s assets on October 1, 2019, were as follows:

Acme Company shares have a fair value of $50. A fair (market) price is not available for shares of the other companies because they are closely held. Fair values of liabilities equal book values.

Required:

A. Prepare a for the business combination. Assume the following: Acme Company acquires all the assets and assumes all the liabilities of Baltic and Colt Companies by issuing in exchange 140,000 shares of its common stock to Baltic Company and 40,000 shares of its common stock to Colt Company.

B. Assume, further, that the acquisition was consummated on October 1, 2019, as described above. However, by the end of 2020, Acme was concerned that the fair values of one or both of the acquired units had deteriorated. To test for impairment, Acme decided to measure impairment using the present value of future cash flows to estimate the fair value of the reporting units (Baltic and Colt). Acme accumulated the following data:

Prepare the journal entry, if needed, to record impairment at December 31, 2020. Use FASB’s simplified approach to test for impairment (assume that the qualitative test is satisfied or bypassed).

The following balance sheets were reported on January 1, 2019,

The following balance sheets were reported on January 1, 2019, for Peach Company and Stream Company:

Required:

Appraisals reveal that the inventory has a fair value of $120,000, and the equipment has a current value of $410,000. The book value and fair value of liabilities are the same. Assuming that Peach Company wishes to acquire Stream for cash in an asset acquisition, determine the following cutoff amounts:

A. The purchase price above which Peach would record goodwill.

B. The purchase price below which the equipment would be recorded at less than its fair market value.

C. The purchase price below which Peach would record a gain.

D. The purchase price below which Peach would obtain a “bargain.”

E. The purchase price at which Peach would record $50,000 of goodwill.

P Company acquired the assets and assumed the liabilities of

P Company acquired the assets and assumed the liabilities of S Company on January 1, 2018, for $510,000 when S Company’s was as follows:

S COMPANY
Balance Sheet
January 1, 2018

Cash…………………………………………………………………$ 96,000
Receivables…………………………………………………………55,200
Inventory…………………………………………………………..110,400
Land………………………………………………………………….169,200
Plant and equipment (net)…………………………………466,800
Total………………………………………………………………..$897,600
Accounts payable……………………………………………..$ 44,400
Bonds payable, 10%, due 12/31/2023, Par…………480,000
Common stock, $2 par value…………………………….120,000
Retained earnings……………………………………………..253,200
Total………………………………………………………………..$897,600

Fair values of S Company’s assets and liabilities were equal to their book values except for the following:

1. Inventory has a fair value of $126,000.

2. Land has a fair value of $198,000.

3. The bonds pay interest semiannually on June 30 and December 31. The current yield rate on bonds of similar risk is 8%.

Required:

Prepare the journal entry on P Company’s books to record the acquisition of the assets and assumption of the liabilities of S Company.

The balance sheets of Petrello Company and Sanchez Company as

The balance sheets of Petrello Company and Sanchez Company as of January 1, 2019, are presented below. On that date, after an extended period of negotiation, the two companies agreed to merge. To effect the merger, Petrello Company is to exchange its unissued common stock for all the outstanding shares of Sanchez Company in the ratio of 1/2 share of Petrello for each share of Sanchez. Market values of the shares were agreed on as Petrello, $48; Sanchez, $24. The fair values of Sanchez Company’s assets and liabilities are equal to their book values with the exception of plant and equipment, which has an estimated fair value of $720,000.

Required:

Prepare a for Petrello Company immediately after the merger.

Pool Company purchased 90% of the outstanding common stock of

Pool Company purchased 90% of the outstanding of Spruce Company on December 31, 2019, for cash. At that time the of Spruce Company was as follows:

Current assets…………………………………………………………….$1,050,000
Plant and equipment……………………………………………………….990,000
Land………………………………………………………………………………..170,000
Total assets…………………………………………………………………$2,210,000
Liabilities……………………………………………………………………….$ 820,000
Common stock, $20 par value………………………………………….900,000
Other contributed capital…………………………………………………440,000
Retained earnings……………………………………………………………150,000
Total……………………………………………………………………………..2,310,000
Less treasury stock at cost, 5,000 shares………………………….100,000
Total equities………………………………………………………………$2,210,000

Required:

Prepare the elimination entry required for the preparation of a consolidated workpaper on December 31, 2019, assuming:

(1) The purchase price of the stock was $1,400,000. Assume that any difference between the book value of net assets and the value implied by the purchase price relates to subsidiary land. 

(2) The purchase price of the stock was $1,160,000. Assume that the subsidiary land has a fair value of $180,000, and the other assets and liabilities are fairly valued.

Balance sheets for P Company and S Company on August

Balance sheets for P Company and S Company on August 1, 2019, are as follows:

Required:

Prepare a workpaper for a consolidated for P Company and its subsidiary on August 1, 2019, taking into consideration the following:

1. P Company acquired 90% of the outstanding common stock of S Company on August 1, 2019, for a cash payment of $586,500.

2. Included in the Investment in Bonds account are $40,000 of S Company bonds payable that were purchased at par by P Company in 2002. The bonds pay interest on April 30 and October 31. S Company has appropriately accrued interest expense on August 1, 2019; P Company, however, inadvertently failed to accrue interest income on the S Company bonds.

3. Included in P Company receivables is a $35,000 cash advance to S Company that was mailed on August 1, 2019. S Company had not yet received the advance at the time of the preparation of its August 1, 2019.

4. Assume that any excess of book value over the value implied by purchase price is due to overvalued plant and equipment.