University of Michigan Balance Sheet of Buddy Dog Food Company Questions – Assignment Help

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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

EBITDA

Probability

$1,000,000 .3

$2,100,000 .2

$3,000,000 .4

$5,000,000 .1

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:

Buddy

Book Values

Cats Rule

Book Values

Cats Rule Fair Values of

booked assets and

liabilities

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

Goodwill 8,000,000

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

Capital

14,000,000 7,000,000

Retained Earnings 6,500,000 16,000,000

36,000,000 32,300,000

As the Buddy accountant in charge of accounting for the acquisition, you discover the following:

2

 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%.

Required:

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

your work.

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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