On May 1, Donovan Company reported the following account balances:Current assets . . . . . . . . . . . . $ 90,000Buildings & equipment (net) . 220,000Total assets . . . . . . . . . . . .. . $310,000Liabilities . . . . . . . . . . . . . . . . $ 60,000Common stock . . . . . . . . . . . . . 150,000Retained earnings . . . . . . . . . 100,000Total liabilities and equities . $310,000On May 1, Beasley paid $400,000 in stock (fair value) for all of the assets and liabilities of Donovan, which will cease to exist as a separate entity. In connection with the merger, Beasley incurred $15,000 in accounts payable for legal and accounting fees.Beasley also agreed to pay $75,000 to the former owners of Donovan contingent on meeting certain revenue goals during the following year. Beasley estimated the present value of its probability adjusted expected payment for the contingency at $20,000. In determining its offer, Beasley noted the following:∙ Donovan holds a building with a fair value $30,000 more than its book value. ∙ Donovan has developed unpatented technology appraised at $25,000, although is it not recorded in its financial records.∙ Donovan has a research and development activity in process with an appraised fair value of $45,000. The project has not yet reached technological feasibility.∙ Book values for Donovan’s current assets and liabilities approximate fair values. What should Beasley record as total liabilities incurred or assumed in connection with the Donovan merger?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
On May 1, Donovan Company reported the following account balances:
Current assets . . . . . . . . . . . . $ 90,000
Buildings & equipment (net) . 220,000
Total assets . . . . . . . . . . . .. . $310,000
Liabilities . . . . . . . . . . . . . . . . $ 60,000
Common stock . . . . . . . . . . . . . 150,000
Total liabilities and equities . $310,000
On May 1, Beasley paid $400,000 in stock (fair value) for all of the assets and liabilities of Donovan, which will cease to exist as a separate entity. In connection with the merger, Beasley incurred $15,000 in accounts payable for legal and accounting fees.
Beasley also agreed to pay $75,000 to the former owners of Donovan contingent on meeting certain
revenue goals during the following year. Beasley estimated the present value of its probability adjusted
expected payment for the contingency at $20,000. In determining its offer, Beasley noted the following:
∙ Donovan holds a building with a fair value $30,000 more than its book value. ∙ Donovan has developed unpatented technology appraised at $25,000, although is it not recorded
in its financial records.
∙ Donovan has a research and development activity in process with an appraised fair value of
$45,000. The project has not yet reached technological feasibility.
∙ Book values for Donovan’s current assets and liabilities approximate fair values.
What should Beasley record as total liabilities incurred or assumed in connection with the Donovan merger?
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