Consider the following premerger information about Firm X and Firm Y:
Firm X Firm Y
Total earnings 87,000 18,000
Shares outstanding 44,000 19,000
Per-share values:
Market 59 15
Book 17 8
Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $6 per share, and that neither firm has any debt before or after the merger.
Construct the postmerger balance sheet for Firm X assuming the use of the purchase accounting method.
Share Purchase Premium 6
Assets from X 748,000 (Book value of X)
Assets from Y 285,000 (Market Value Y)
Purchase Price Y 399,000 (Market price + Premium) x # Shares
Goodwill 114,000 Purchase Price - Assets from Y
Total Assets XY 1,147,000 (Assets from X + Assets from Y + Goodwill)
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