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 ﬁ nders’ fees $ 5,000
Costs of issuing shares 7,000
Two alternative proposals are being considered:
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.
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:
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
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
(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.