Constant Corp. bought Steady Company on June 30, 2005 in a pooling-of-interests transaction. Both companies are in stagnant markets. Steady had total assets of $50,000 and total liabilities of $30,000 with fair market values of $60,000 and $30,000, respectively. Constant issued 1,000 shares, valued at $45 per share. Both companies operate in tax-free havens and take a half-year's depreciation in the year acquired using ten-year lives. Monthly operating results are as follows:
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Per Month }$
$\begin{array} { | l | r | r | }
\hline \text { Sales } & \$ 3,000 & \$ 1,000 \
\hline \text { Expenses } & 2,000 & 800 \
\hline \text { Net income } & \$ 1,000 & \$ 200\
\hline
\end{array}$ Assume revenue and earnings remain same for the next year. Company is following SFAS 142.
-If accounted for as a purchase, 2005 consolidated earnings are reported as

Question

Constant Corp. bought Steady Company on June 30, 2005 in a pooling-of-interests transaction. Both companies are in stagnant markets. Steady had total assets of $50,000 and total liabilities of $30,000 with fair market values of $60,000 and $30,000, respectively. Constant issued 1,000 shares, valued at $45 per share. Both companies operate in tax-free havens and take a half-year's depreciation in the year acquired using ten-year lives. Monthly operating results are as follows:
 $\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Per Month }$
$\begin{array} { | l | r | r | } 
\hline \text { Sales } & \$ 3,000 & \$ 1,000 \
\hline \text { Expenses } & 2,000 & 800 \
\hline \text { Net income } & \$ 1,000 & \$ 200\
\hline
\end{array}$ Assume revenue and earnings remain same for the next year. Company is following SFAS 142.
-If accounted for as a purchase, 2005 consolidated earnings are reported as

Quizplus · Accepted Answer

Under SFAS 142, goodwill is not amortized. The consolidated earnings for 2005 would include the net income from both companies for the second half of the year. Constant's earnings for 6 months are $6,000 (6 x $1,000) and Steady's earnings for 6 months are $1,200 (6 x $200), totaling $7,200. Adding the $5,500 gain from the excess of fair value over book value of Steady's net assets ($60,000 - $50,000), the total is $12,700.

Constant Corp Per Month \quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Per Month } Per Month Assume Revenue and Earnings Remain Same for the Next Year

Constant Corp $\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Per Month }$ Assume Revenue and Earnings Remain Same for the Next Year