Assets Liabilities and Equity $ 150,000 180,000 50,000 600,000 (150,000) 40,000 $ 870,000 Cash and receivables Current liabilities . Inventory Land. . Building . Accumulated depreciation 9% Bonds payable Common stock ($5 par) . Paid-in capital in excess of par Retained earnings $120,000 300,000 100,000 200,000 150,000 Goodwill Total assets. Total liabilities and equity $870,000 ...

EBK CFIN
6th Edition
ISBN:9781337671743
Author:BESLEY
Publisher:BESLEY
Chapter12: Capital Structure
Section: Chapter Questions
Problem 1PROB
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Caswell Company is contemplating the purchase of LaBelle Company as of January 1, 2016. LaBelle Company has provided the following current balance sheet: (see attachment)

The following information exists relative to balance sheet accounts:
a. The inventory has a fair value of $200,000.
b. The land is appraised at $100,000 and the building at $600,000.
c. The 9% bonds payable have five years to maturity and pay annual interest each December 31. The current interest rate for similar bonds is 8% per year.
d. It is likely that there will be a payment for goodwill based on projected income in excess of the industry average, which is 10% on total assets. Caswell will project the average past five years’ operating income and will pay for excess income based on an assumption of a 5-year life and a risk rate of return of 16%. The past five years’ net incomes for LaBelle are as follows:
2011 $120,000
2012 140,000
2013 150,000
2014 200,000 (includes $40,000 extraordinary gain)
2015 180,000

1. Provide an estimate of fair value for the bonds and for goodwill.
2. Using the values derived in part (1), record the acquisition on the Caswell books.

Assets
Liabilities and Equity
$ 150,000
180,000
50,000
600,000
(150,000)
40,000
$ 870,000
Cash and receivables
Current liabilities .
Inventory
Land. .
Building .
Accumulated depreciation
9% Bonds payable
Common stock ($5 par) .
Paid-in capital in excess of par
Retained earnings
$120,000
300,000
100,000
200,000
150,000
Goodwill
Total assets.
Total liabilities and equity
$870,000
...
Transcribed Image Text:Assets Liabilities and Equity $ 150,000 180,000 50,000 600,000 (150,000) 40,000 $ 870,000 Cash and receivables Current liabilities . Inventory Land. . Building . Accumulated depreciation 9% Bonds payable Common stock ($5 par) . Paid-in capital in excess of par Retained earnings $120,000 300,000 100,000 200,000 150,000 Goodwill Total assets. Total liabilities and equity $870,000 ...
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