ACC – Myers Company Ltd. Problem

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Description

Problem 9 Myers Company Ltd. was formed 10 years ago by the issuance of 22,000 common

shares to three shareholders. Four years later the company went public and issued

an additional 30,000 common shares.

The management of Myers is considering a takeover in which Myers would

purchase all of the assets and assume all of the liabilities of Norris Inc. Other costs

associated with the takeover would be as follows:

Legal, appraisal, and ? nders’ fees $ 5,000

Costs of issuing shares 7,000

$12,000

Two alternative proposals are being considered:

PROPOSAL 1

Myers would offer to pay $300,000 cash for the Norris net assets, to be financed by

a $300,000 bank loan due in five years.

PROPOSAL 2

Myers would issue 50,000 shares currently trading at $8 each for the Norris net

assets. Norris shareholders would be offered five seats on the 10-member board

of directors of Myers, and the management of Norris would be absorbed into the

surviving company.

Balance sheet data for the two companies prior to the combination are as

follows:

Myers Norris

Book value Book value Fair value

Cash $ 140,000 $ 52,500 $ 52,500

Accounts receivable 167,200 61,450 56,200

Inventory 374,120 110,110 134,220

Land 425,000 75,000 210,000

Buildings (net) 250,505 21,020 24,020

Equipment (net) 78,945 17,705 15,945

$1,435,770 $337,785

Current liabilities $ 133,335 $ 41,115 41,115

Non-current liabilities — 150,000 155,000

Common shares 500,000 100,000

Retained earnings 802,435 46,670

$1,435,770 $337,785

Required:

(a) Prepare the journal entries of Myers for each of the two proposals being

considered.

(b) Prepare the balance sheet of Myers after the takeover for each of the proposals

being considered.

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