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

The market value of All Gold Mining's fixed assets is $3,800, so the new total value of fixed assets is $38,800 ($35,000 + $3,800). The market values for current and other assets are the same as the book values, so the new total value of current and other assets is $21,000 ($21,000 + $0). Silver Enterprises issued $5,000 in new long-term debt to finance the acquisition, so the new total value of liabilities is $13,100 ($8,100 + $5,000). Therefore, the new total equity is $46,700 ($38,800 + $21,000 - $13,100). Goodwill is calculated as the purchase price ($38,800 + $21,000 + $5,000 = $64,800) minus the net tangible assets ($35,000 + $8,100 = $43,100), so goodwill is $21,700 ($64,800 - $43,100). Therefore, the post-merger balance sheet will reflect goodwill of $21,700 and total equity of $46,700. The correct answer is C.

Silver Enterprises Has Acquired All Gold Mining in a Merger