How are intangibles considered in the merger model?

FinanceFinance ManagementBanking & Finance

Considered the following balance sheet

AssetsEquity & liabilities

$
$
Fixed assets900000Equity share capital685000
Investments90000Reserves300000
Receivables29500010% Debentures425000
Bank125000


1410000
1410000

Company 2 is paid $ 150000 for assets for company 1

Assume fair market value of fixed asset = $ 1000000

Solution

The solution is as follows −

  • Considered fixed assets (given)
    Fixed assets (fair value) = $1000000
  • Next step is to calculate net worth of assets and liabilities, these are calculated by adding fixed assets, investments, receivables and bank and subtracting from 10% debentures.
    Net worth of assets and liabilities = $77500 + $ 90000 + $ 295000 + 125000 − $ 425000
    = $587500 − $425000 => $ 162500
  • Now in this case, the second company paid an amount of $150000 for the first company. So intangibles from the second company are subtracted to the amount paid by the first company to the second company.
    Intangibles = $162500 − $ 150000
    Intangibles = $ 12500
  • Intangibles of the second company are calculated from the second step (calculating net worth of assets and liabilities (that is $1625002).
  • Now finial intangibles are calculated by subtracting net worth of assets and liabilities of the second company from the amount paid by second company to first company (that is $150000). Intangibles = $ 12500
    Therefore, $ 12500 is reflected in company 2 balance sheet in intangibles.
raja
Published on 19-Jul-2021 09:43:13
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