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Describe the difference between the economic entity concept and the parent company concept…
Describe the difference between the economic entity concept and the parent company concept approaches to the reporting of subsidiary assets and liabilities in the consolidated financial statements on the date of the acquisition.
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The following information from the financial statements of Kraft Foods and Cadbury PLC is available…
AFS1-2 Kraft Acquires Cadbury PLC
The following information from the financial statements of Kraft Foods and Cadbury PLC is available for the three years prior to their merger. Evaluate the performance of each company leading up to the year of the acquisition (2010). Note that Cadbury”s financial statements are in millions of pounds, while Kraft”s statements are in millions of dollars.
Kraft Foods ($ millions) 2007 2008 2009 Balance Sheet Assets 67,993 63,173 66,714 Total Liabilities 40,698 40,817 40,742 Stockholders” Equity 27,295 22,356 25,972 Selected Balance Sheet items Market value of equity 50,480 48,110 40,111 Current Assets 10,737 9,917 12,454 Current Liabilities 17,086 11,044 11,491 Accounts Receivable 5,197 4,704 5,197 Inventory 4,096 3,881 3,775 Long-term Debt 13,624 19,354 18,537 Retained Earnings 12,209 13,440 14,636 Income Statement Total Revenues 37,241 40,492 38,754 Cost of Goods Sold 24,651 27,164 24,819 Gross Margin 12,590 13,328 13,935 Income continuing operations 2,590 1,678 2,810 Net income 2,590 2,884 3,021 Selected Income Statement items Interest Expense 604 1,240 1,237 Tax Expense 1,137 658 1,136 Statement of Cash Flows Cash from Operations (CFO) 3,571 4,141 5,084 Cash interest paid 628 968 1,308 Cash taxes paid 1,366 964 1,025 Cadbury (£ millions) 2007 2008 2009 Balance Sheet Assets 11,338 8,895 8,129 Total Liabilities 7,165 5,361 4,607 Stockholders” Equity 4,173 3,534 3,522 Selected Balance Sheet items Market value of equity 9,581 8,241 12,266 Current Assets 2,600 2,635 2,125 Current Liabilities 4,614 3,388 2,434 Accounts Receivable 1,197 1,067 978 Inventory 821 767 748 Long-term Debt 1,120 1,194 1,349 Retained Earnings 2,677 2,498 3,502 Income Statement Total Revenues 4,699 5,384 5,975 Cost of Goods Sold 5,504 2,870 3,210 Gross Margin 2,195 2,514 2,765 Income continuing operations 149 370 275 Net income 405 364 509 Selected Income Statement items Interest Expense 88 50 172 Tax Expense 105 30 103 Statement of Cash Flows Cash from Operations (CFO) 812 469 523 Cash interest paid 193 165 122 Cash taxes paid 235 153 163
Required:
- Use the method described in Appendix A to evaluate the health of the target company, and point out any trends that might have been worrisome to Kraft. Also indicate any strengths in the firm”s performance.
- Use the method described in Appendix A to evaluate the health of Kraft Foods, and point out any positive or negative trends.
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AFS1-2 Kraft Acquires Cadbury PLC
The following information from the financial statements of Kraft Foods and Cadbury PLC is available for the three years prior to their merger. Evaluate the performance of each company leading up to the year of the acquisition (2010). Note that Cadbury”s financial statements are in millions of pounds, while Kraft”s statements are in millions of dollars.
| Kraft Foods ($ millions) | 2007 | 2008 | 2009 |
| Balance Sheet | |||
| Assets | 67,993 | 63,173 | 66,714 |
| Total Liabilities | 40,698 | 40,817 | 40,742 |
| Stockholders” Equity | 27,295 | 22,356 | 25,972 |
| Selected Balance Sheet items | |||
| Market value of equity | 50,480 | 48,110 | 40,111 |
| Current Assets | 10,737 | 9,917 | 12,454 |
| Current Liabilities | 17,086 | 11,044 | 11,491 |
| Accounts Receivable | 5,197 | 4,704 | 5,197 |
| Inventory | 4,096 | 3,881 | 3,775 |
| Long-term Debt | 13,624 | 19,354 | 18,537 |
| Retained Earnings | 12,209 | 13,440 | 14,636 |
| Income Statement | |||
| Total Revenues | 37,241 | 40,492 | 38,754 |
| Cost of Goods Sold | 24,651 | 27,164 | 24,819 |
| Gross Margin | 12,590 | 13,328 | 13,935 |
| Income continuing operations | 2,590 | 1,678 | 2,810 |
| Net income | 2,590 | 2,884 | 3,021 |
| Selected Income Statement items | |||
| Interest Expense | 604 | 1,240 | 1,237 |
| Tax Expense | 1,137 | 658 | 1,136 |
| Statement of Cash Flows | |||
| Cash from Operations (CFO) | 3,571 | 4,141 | 5,084 |
| Cash interest paid | 628 | 968 | 1,308 |
| Cash taxes paid | 1,366 | 964 | 1,025 |
| Cadbury (£ millions) | 2007 | 2008 | 2009 |
| Balance Sheet | |||
| Assets | 11,338 | 8,895 | 8,129 |
| Total Liabilities | 7,165 | 5,361 | 4,607 |
| Stockholders” Equity | 4,173 | 3,534 | 3,522 |
| Selected Balance Sheet items | |||
| Market value of equity | 9,581 | 8,241 | 12,266 |
| Current Assets | 2,600 | 2,635 | 2,125 |
| Current Liabilities | 4,614 | 3,388 | 2,434 |
| Accounts Receivable | 1,197 | 1,067 | 978 |
| Inventory | 821 | 767 | 748 |
| Long-term Debt | 1,120 | 1,194 | 1,349 |
| Retained Earnings | 2,677 | 2,498 | 3,502 |
| Income Statement | |||
| Total Revenues | 4,699 | 5,384 | 5,975 |
| Cost of Goods Sold | 5,504 | 2,870 | 3,210 |
| Gross Margin | 2,195 | 2,514 | 2,765 |
| Income continuing operations | 149 | 370 | 275 |
| Net income | 405 | 364 | 509 |
| Selected Income Statement items | |||
| Interest Expense | 88 | 50 | 172 |
| Tax Expense | 105 | 30 | 103 |
| Statement of Cash Flows | |||
| Cash from Operations (CFO) | 812 | 469 | 523 |
| Cash interest paid | 193 | 165 | 122 |
| Cash taxes paid | 235 | 153 | 163 |
Required:
- Use the method described in Appendix A to evaluate the health of the target company, and point out any trends that might have been worrisome to Kraft. Also indicate any strengths in the firm”s performance.
- Use the method described in Appendix A to evaluate the health of Kraft Foods, and point out any positive or negative trends.
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Computer the amount of goodwill actually recorded, assuming the negotiations result in a final…
Estimating Goodwill and Valuation
Alpha Company is considering the purchase of Beta Company. Alpha has collected the following data about Beta:
Beta Company Book Values Estimated Market Values Total identifiable assets $585,000 $750,000 Total liabilities 320,000 320,000 Owners” equity $265,000
Cumulative total net cash earnings for the past five years of $850,000 includes extraordinary cash gains of $67,000 and nonrecurring cash losses of $48,000.
Alpha Company expects a return on its investment of 15%. Assume that Alpha prefers to use cash earnings rather than accrual-based earnings to estimate its offering price, and that it estimates the total valuation of Beta to be equal to the present value of cash-based earnings (rather than excess earnings) discounted over five years. (Goodwill is then computed as the amount implied by the excess of the total valuation over the identifiable net assets valuation.)
Required:
- Compute (a) an offering price based on the information above that Alpha might be willing to pay, and (b) the amount of goodwill included in that price.
- Compute the amount of goodwill actually recorded, assuming the negotiations result in a final purchase price of $625,000 cash.
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Alpha Company is considering the purchase of Beta Company. Alpha has collected the following data about Beta:
| Beta Company Book Values | Estimated Market Values | |
| Total identifiable assets | $585,000 | $750,000 |
| Total liabilities | 320,000 | 320,000 |
| Owners” equity | $265,000 |
Cumulative total net cash earnings for the past five years of $850,000 includes extraordinary cash gains of $67,000 and nonrecurring cash losses of $48,000.
Alpha Company expects a return on its investment of 15%. Assume that Alpha prefers to use cash earnings rather than accrual-based earnings to estimate its offering price, and that it estimates the total valuation of Beta to be equal to the present value of cash-based earnings (rather than excess earnings) discounted over five years. (Goodwill is then computed as the amount implied by the excess of the total valuation over the identifiable net assets valuation.)
Required:
- Compute (a) an offering price based on the information above that Alpha might be willing to pay, and (b) the amount of goodwill included in that price.
- Compute the amount of goodwill actually recorded, assuming the negotiations result in a final purchase price of $625,000 cash.
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