Silver Enterprises has acquired All Gold Mining in a merger transaction.The following balance sheets represent the premerger book values for both firms. Assume the merger is treated as a purchase for accounting purposes.The market value of All Gold Mining's fixed assets is $3,800; the market values for current and other assets are the same as the book values.Assume that Silver Enterprises issues $5,000 in new long-term debt to finance the acquisition.The post-merger balance sheet will reflect goodwill of _____ and total equity of _____.

Question

Silver Enterprises has acquired All Gold Mining in a merger transaction.The following balance sheets represent the premerger book values for both firms.  Assume the merger is treated as a purchase for accounting purposes.The market value of All Gold Mining's fixed assets is $3,800; the market values for current and other assets are the same as the book values.Assume that Silver Enterprises issues $5,000 in new long-term debt to finance the acquisition.The post-merger balance sheet will reflect goodwill of _____ and total equity of _____.

Quizplus · Accepted Answer

Goodwill will be created since the acquisition price is greater than the book value. The goodwill amount is equal to the purchase price minus the market value of assets, plus the market value of the acquired company's debt.Goodwill = $5,000 - ($3,800 market value FA) - ($600 market value of CA) - ($210 market value OA) + ($500 current liabilities) = $890Total equity = Equity of acquiring firm = $2,700

Silver Enterprises Has Acquired All Gold Mining in a Merger