I need support with this Accounting question so I can learn better.
The solution must be 1) typed, 2) computations carefully labelled and 3) computations rounded to the
nearest dollar. Have the mindset that you are communicating to your boss about the work you have done so
you want to make sure they understand it.
Acquisition of Cats Rule:
On January 1, 2019, Buddy Dog Food Company acquired Cats Rule Food Company for $3,000,000 cash and
2,500,000 shares of Buddy, $5 par common stock which had a fair value of $12 per share on 1/1/19. These
amounts were paid to acquire all of the shares of Cats Rule Food Company. Buddy immediately delisted
those shares and decided to treat the acquisition as a merger.
Buddy also has agreed to pay the stockholders additional compensation based upon the realized Cats Rule
EBITDA over the first 3 years that Buddy owns Cats Rule. The compensation will be 10% of the excess of the
3-year cumulative EBITDA over $2,000,000. A discount rate of 10% is reasonable. The probability distribution
that Buddy has estimated for Cats Rule’s cumulative EBITDA is:
3 year Cumulative
Other information about the acquisition:
The 1/1/19 Buddy’s balance sheet before the acquisition is recorded and Cats Rule balance sheet and related
booked asset and liability fair values are below:
Cats Rule Fair Values of
booked assets and
Cash $7,000,000 $500,000 $500,000
Inventory 1,000,000 800,000 850,000
Plant & Equipment net 20,000,000 30,000,000 21,000,000
Trademarks 1,000,000 4,000,000
Total Assets 36,000,000 32,300,000
Current Liabilities 500,000 300,000 300,000
Bonds Payable 10,000,000 8,000,000 See information below
Common stock 5,000,000 1,000,000
Additional Paid In
Retained Earnings 6,500,000 16,000,000
As the Buddy accountant in charge of accounting for the acquisition, you discover the following:
In-process Research and Development’s fair value is $700,000
The estimated decrease in cost due to duplicate distribution processes is $500,000 to be realized in
the first two years of the combined company.
Customer contracts and relationships are valued at $1,000,000
Cats Rule has an office lease that is below market rate, it is estimated to be valued at $30,000 and
Buddy will continue to use the space.
On 1/1/19, Cats Rule’s bond payable has a $8,000,000 face. It pays 6% annually and has 10 years left
until it matures. At 1/1/19, such bonds sell to yield 2%.
1. Compute the bond’s fair value at 1/1/19. Show all of your work.
2. Show in detail how your computed goodwill or bargain purchase gain as applicable. Label well all of
3. Prepare the entry that Buddy will make on its books to record the acquisition of Cat’s Rule.
4. Prepare the Buddy balance sheet immediately after the acquisition has been recorded, on 1/1/19.
5. Assume that you discover on 5/1/19 a lawsuit that had been filed on 12/15/18 about a product
safety issue with Cats Rule chews. The estimated liability of the lawsuit is $400,000. Prepare the
adjusting entry related to this discovery.
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