The balance sheets of Petrello Company and Sanchez Company as of January 1, 2011, are presented below. On that date, after an extended period of negotiation, the two companies agreed to merge. To effect the merger, Petrello Company is to exchange its unissued common stock for all the oustaning shares of Sanchez Company in the ratio of 1/2 share of Petrello each share of Sanchez. Market values of the shares were agreed on as Petrello, $48; Sanchez, $24. The fair values of Sanchez Company's assets and laibilities are equal to their book values with the exception of plant and equipment. which has an estimated fair value of $720,000.
Pertello Sanchez
Cash $480,000 $200,000
Receivables 480,000 240,000
Inventories 2,000,000 240,000
Plant &
equipment(net)3,840,000 800,000
_________ ________
Total assets $6,800,000 $1,480,000
Liabilities $1,200,000 320,000
Common stock
$16 par value 3,440,000 800,000
Other contrivuted
capital 400,000 000,000
Retained
earnings 1,760,000 360,000
_________ _________
Total equities $6,800,000 $1,480,000
Required: Prepare a balance sheet for Petrello Company immediately after the merger.
Can anyone please help me? Thank you
how to prepare the balance sheet for petrello company
To prepare a balance sheet for Petrello Company immediately after the merger, we need to consider the exchange of shares between Petrello and Sanchez Companies and update the balance sheet accordingly.
First, let's calculate the number of shares Petrello will issue to acquire all the outstanding shares of Sanchez Company:
Number of shares of Petrello = Number of shares of Sanchez / Exchange Ratio
= (Total equity of Sanchez / Market value per share of Sanchez) / (Market value per share of Petrello / Market value per share of Sanchez)
= (1,480,000 / 24) / (48 / 24)
= 61,666.67
Now, let's calculate the fair value of Sanchez Company's plant and equipment after the merger:
Fair value of Sanchez's plant and equipment = Estimated fair value - Net book value before the merger
= 720,000 - 800,000
= -80,000 (This will be treated as a loss)
With this information, let's prepare the balance sheet for Petrello Company after the merger:
Petrello Company Balance Sheet
As of January 1, 2011
Assets:
Cash: $480,000
Receivables: $480,000
Inventories: $2,000,000
Plant & Equipment (Net): $720,000
Intangible Assets (e.g., Goodwill, if any): - $80,000 (Loss from the merger)
Total Assets: $3,600,000
Liabilities:
Liabilities from the Sanchez Company: $320,000
Equity:
Common Stock ($16 par value): $3,440,000
Other Contributed Capital: $400,000
Retained Earnings: $1,760,000
Total Equity: $5,600,000
Total Liabilities and Equity: $3,600,000
Note: This is a simplified balance sheet after the merger. Additional adjustments may be required depending on the specific terms and conditions of the merger agreement. It is always recommended to consult with a financial expert or accountant for accurate and comprehensive financial reporting.
To prepare a balance sheet for Petrello Company immediately after the merger, you need to consider the exchange ratio (1/2 share of Petrello for each share of Sanchez) and the agreed market values of the shares (Petrello: $48 and Sanchez: $24).
Here is the step-by-step process to prepare the balance sheet:
1. Calculate the number of shares of Sanchez Company that will be exchanged for Petrello shares:
- Number of Sanchez shares = Total common stock of Sanchez Company / Par value per share
- Number of Sanchez shares = $800,000 / $16 = 50,000 shares
2. Calculate the number of Petrello shares to be issued:
- Number of Petrello shares = Exchange ratio * Number of Sanchez shares
- Number of Petrello shares = 1/2 * 50,000 = 25,000 shares
3. Determine the total value of Petrello shares to be issued:
- Total value of Petrello shares = Number of Petrello shares * Market value per share
- Total value of Petrello shares = 25,000 * $48 = $1,200,000
4. Prepare the balance sheet for Petrello Company after the merger:
Assets:
Cash: $480,000
Receivables: $480,000
Inventories: $2,000,000
Plant & Equipment (net): $3,840,000
Sanchez Company Common Stock: $1,200,000 (newly issued for the merger)
Total Assets: $7,000,000 ($6,800,000 + $200,000)
Liabilities:
Liabilities: $1,200,000
Total Liabilities: $1,200,000
Equity:
Common stock: $3,440,000
Other contributed capital: $400,000
Retained earnings: $1,760,000
Total Equity: $5,600,000 ($3,440,000 + $400,000 + $1,760,000)
Total Liabilities and Equity: $6,800,000 ($1,200,000 + $5,600,000)
Note: In the balance sheet, the Sanchez Company Common Stock represents the newly issued shares of Petrello Company as compensation for the merger.