Assets Liabilities and Equity $ 180,000 Current liabilities... 460,000 8% Mortgage payable 730,000 Common stock ($5 par)...... 120,000 Paid-in capital in excess of par 630,000 Retained earnings ... (400,000) 135,000 (85,000) 175,000 Cash Accounts receivable $ 425,000 600,000 250,000 Inventory Land.... Building.. Accumulated depreciation-building . Equipment .... Accumulated depreciation equipment Goodwill .... 750,000 (80,000) Total assets. $1,945,000 Totalliabilities and equity .. $1,945,000
Your client, Great Value Hardware Stores, has come to you for assistance in evaluating an opportunity to purchase a controlling interest in a hardware store in a neighboring city. The store under consideration is a closely held family corporation. Owners of 60% of the shares are willing to sell you the 60% interest, 30,000 common stock shares in exchange for 7,500 of Great Value shares, which have a fair value of $40 each and a par value of $10 each.
Your client sees this as a good opportunity to enter a new market. The controller of Great Value knows, however, that all is not well with the store being considered. The store, Al’s Hardware, has not kept pace with the market and has been losing money. It also has a major lawsuit against it stemming from alleged faulty electrical components it supplied that caused a fire. The store is not insured for the loss. Legal counsel advises that the store will likely pay $300,000 in damages.
The following
Your analysis raises substantial concerns about the values shown. You have gathered the following information:
1. Aging of the
2. The inventory has many obsolete items; the fair value is $600,000.
3. Appraisals for long-lived assets are as follows:
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
4. The
5. Liabilities are fairly stated except that there should be a provision for the estimated loss on the lawsuit.
On the basis of your research, you are convinced that the statements of Al’s Hardware are not representative and need major restatement. Your client is not interested in being associated with statements that are not accurate.
Your client asks you to make recommendations on two concerns:
1. Does the price asked seem to be a real bargain? Consider the fair value of the entire equity of Al’s Hardware; then decide if the price is reasonable for a 60% interest.
2. If the deal were completed, what accounting methods would you recommend either on the books of Al’s Hardware or in the consolidation process? Al’s Hardware would remain a separate legal entity with a substantial noncontrolling interest.
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