Balance sheet information for Sphinx Company at January 1, 2013, is summarized as follows:
Current assets $230,000 Liabilities $300,000
Plant assets 450,000 Capital stock $10 par 200,000
Retained earnings 180,000
$680,000
$680,000
Sphinx's assets and liabilities are fairly valued except for plant assets that are undervalued by $50,000. On January 2, 2013, Pyramid Corporation issues 20,000 shares of its $10 par value common stock for all of Sphinx's net assets and Sphinx is dissolved. Market quotations for the two stocks on this date are:
Pyramid common: $28.00
Sphinx common: $19.50
Pyramid pays the following fees and costs in connection with the combination:
Finder's fee $10,000
Legal and accounting fees 6,000
Required:
1. Calculate Pyramid's investment cost of Sphinx Corporation.
2. Calculate any goodwill from the business combination.
What will be an ideal response?
Requirement 1
FMV of shares issued by Pyramid: 20,000 × $28.00= $560,000
Requirement 2
Investment cost from above: $560,000
Less: Fair value of Sphinx's net assets ($680,000 of
total assets plus $50,000 of undervalued plant assets
minus $300,000 of debt) 430,000
Equals: Goodwill from investment in Sphinx $ 130,000
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