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How are intangibles considered in the merger model?
Considered the following balance sheet
|Assets||Equity & liabilities|
|Fixed assets||900000||Equity share capital||685000|
Company 2 is paid $ 150000 for assets for company 1
Assume fair market value of fixed asset = $ 1000000
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.
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