Mergers and acquisitions – Accounting
As discussed in today’s meeting, Paddle-up Inc.’s Board of Directors has requested pro-forma financial statements for several acquisition scenarios of Stream Company.
For the past several years Paddle-Up Inc.’s Executive Management Team had experienced continued pressure from their investors for their lack of growth (markets share, revenue, and profits). On September 1, 2018 the Chief Executive Officer, Chief Operating Officer, and the Chief financial Officer all resigned.
Stream Company shareholders want cash for the sale of 100% of their company (via an Asset Acquisition). Paddle-Up Inc.’s Board of Directors prefers to buy 90% of Stream Company using a combination of cash and Paddle-Up shares (via a Stock Acquisition).
The Board has requested that the accounting department provide a pro-forma balance sheet at date of acquisition (use January 1, 2018 balance sheet information for both companies) for the following two scenarios: Purchase 100% of Stream Company; accounting for as an asset acquisition assuming a cash only payment of $550 million. Purchase 90% of Stream Company; accounting for as a stock acquisition (consolidation) assuming consideration (payment) given is a combination of cash ($50 million) and Paddle-Up stock issuance (20,000,000 shares).
The Board has also requested that the accounting department provide pro-forma consolidated financial statements (income statement, statement of retained earnings, and balance sheet) for the 90% stock acquisition scenario as of December 31, 2018 (using the complete equity method).
Finally, in addition to providing the pro-forma financial statements, the board would like you to write a one page memorandum that addresses the following: Analysis of the two acquisition date scenarios (asset acquisition and stock acquisition). Include in the analysis a brief explanation of the accounting differences between asset and stock acquisitions. Analysis of the consolidated financial statements as of 12/31/18. Recommendation in regards to several ethical questions included in a note received from the Paddle-Up Inc. acquisition team (Exhibit A). Consider whether the type of acquisition (asset or stock) impacts your evaluation. Analysis whether the stock acquisition of Stream Company is a good financial and strategic decision.
Report Requirement Detail (50 Points): (10 points) – Memorandum to the Board of Directors (1 page). (10 points) – Asset acquisition balance sheet (date of acquisition). Goodwill calculation Journal entry Schedule showing the impact of the journal entry on Paddle-Up Inc.’s balance sheet to arrive at the post-asset acquisition balance sheet. (15 points) – Stock acquisition balance sheet (date of acquisition). Acquisition Journal entry Workpaper entries in journal entry form Workpaper (15 points) – Stock acquisition 3-section workpaper as of 12/31/18 (complete equity method). Acquisition Journal entry Workpaper entries in journal entry form Workpaper Supporting Data: The request memorandum (page 1) and the attached pages provide all the necessary information to complete the project.
Exhibit A – The Paddle-Up acquisition team discovered during their due diligence that Stream Company did not realize the following key facts: Stream Company management and board did not realize their patents and brands had significant value. Thus, they did not include these asset values in their own internal evaluation of the potential sale to Paddle-Up Inc. Stream Company management and board does not fully understand that more than 25% of their employees will be let go (fired) within 6 months of the acquisition. Stream Company management and board do not realize that their long-term customers will be faced with dramatic price increases to be implemented by Paddle-Up Inc.
Yeer ended December 31, 2018 Trial Balance Fair value Stream Co. Cash Stream Co 78,000 94,000 Balance Sheet & related information as of 1/1/18 (just before acquistion) Balance sheet (in thousands) Paddke-Up Inc Stream Co Assets: Cash 540,000 $ 60,000 Accounts Receivable 166,000 $ 90,000 Inventory 309,000 $ 95,000 Buildings 940,000 $ 250,000 Land $ 160,000 $ 70,000 Total Assets $ 2,115,000 $ 565,000 158,000 $ $ $ $ $ $ 60,000 85,000 90,000 275,000 75,000 585,000 in thousands) Padake-Up Inc 472,000 197,000 75,000 448,000 450,000 962,000 160.000 70,000 822,000 250,500 3,906,500 76,000 275,000 540,000 620,000 923,000 1,420,000 52,500 3,906,500 Accounts Receivable Notes receivable Inventory Investment in S Company Buildings Land Dividends Declared COGS Operating expenses Total debits Accounts payable Notes payable Common stock APIC Retained earings 1/1 Sales Dividend and interest income Total credits Lebrities: Accounts Payable Notes payable – Long tem Total Liabilities 132,000 300,000 432,000 $ $ $ 55,000 60,000 115,000 300,000 70,000 50,000 242,000 124,000 1,116.000 46,000 120,000 200,000 160.000 90.000 500,000 55,000 60,000 115,000 $ $ Stockholders equity: Common stock, Note 1 APIC Retained Earnings Total Equity Total Liabilities and Equity $ $ $ 500,000 260,000 923,000 1,683,000 2,115,000 $ $ $ $ $ 200,000 160,000 90,000 450,000 565,000 1,116,000 Note 1: Common Stock $2 par value (Paddle Up) and $1 par value (Strearn Co.) Note 2: Paddle-up stock has a Market value of $20 per share as of 1/1/18 Other Notes: Paddle-up's Note receivable is a receivable from Stream Co. Interest recognized on the the receivable was $7,500 for December 31, 2018.