| Consider the following premerger information about Firm X and Firm Y: |
| Firm X | Firm Y | |||||
| Total earnings | $ | 95,000 | $ | 22,000 | ||
| Shares outstanding | 52,000 | 17,000 | ||||
| Pre-share values: | ||||||
| Market | $ | 52 | $ | 21 | ||
| Book | $ | 15 | $ | 10 | ||
| Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $6 per share, and that neither firm has any debt before or after the merger. |
| a. | Assuming the pooling of interests method is used, what is the equity of the combined firm? |
| Equity value | $ |
| b. | List the assets of the combined firm assuming the purchase accounting method is used. |
| Assets from X | $ |
| Assets from Y | |
| Goodwill | |
| Total Assets XY | $ |
(A) Assuming the pooling of interests method is used, what is the equity of the combined firm
When one company acquires another company, there are two methods of accounting for the transaction, the purchase method or the pooling of interests method.
.Pooling of interests is one of the accounting methods that companies can choose to employ when combining assets.
| Particular | Amount |
| Equity Value | 170,0000 |
| (17,000 x 10) |
(b) List the assets of the combined firm assuming the purchase accounting method is used.
| Assets From X (52000*52) | 2,704,000 $ |
| Assets From y (17,000*21) | 357,000 $ |
| Goodwill (6*17000) | 102,000 $ |
| Total Assets XY | 3,163,000 $ |
