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D Ltd. and H Corporation are both engaged in the manufacture of computers. On July 1, Year 5, they agree to a merger, whereby D will issue 300,000 shares with current market value of $9 each for the net assets of H.
Summarized balance sheets of the two companies prior to the merger are presented below:
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BALANCE SHEET |
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D Ltd. |
H Corporation |
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Carrying amount |
Carrying amount |
Fair value |
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Current assets |
$ 450,000 |
$ 500,000 |
$ 510,000 |
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Non-current assets (net) |
4,950,000 |
3,200,000 |
3,500,000 |
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$5,400,000 |
$3,700,000 |
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BALANCE SHEET |
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D Ltd. |
H Corporation |
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Carrying amount |
Carrying amount |
Fair value |
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Current liabilities |
$ 600,000 |
$ 800,000 |
800,000 |
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Long-term debt |
1,100,000 |
900,000 |
920,000 |
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Common shares |
2,500,000 |
500,000 |
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Retained earnings |
1,200,000 |
1,500,000 |
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$5,400,000 |
$3,700,000 |
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In determining the purchase price, the management of D Ltd. noted that H Corporation leases a manufacturing facility under an operating lease that has terms that are favorable relative to market terms. However, the lease agreement explicitly prohibits transfer of the lease (through either sale or sublease). An independent appraiser placed a value of $60,000 on this favorable lease agreement.
Required:
Prepare the July 1, Year 5, balance sheet of D, after the merger.
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