The Purchase consideration is the amount of consideration that the old entity is getting in the new company after ceasing to lose its former status. In the question, information is provided regarding how to calculate the purchase consideration.
Example Question
Two companies Alpha and Beta are in the same line of business. They have decided to merge and form a new company Gamma. Gamma will take all the assets and liabilities of the old companies and that the Gamma will be paid $10 share to the value of net assets for each of the old companies. The Balance sheet of Alpha and Beta are as follows:
Balance Sheet
| Alpha | Beta | |
| Assets | ||
| Machinery | 180,000 | 200,000 |
| Property | 190,000 | 150,000 |
| Patents | 30,000 | – |
| Inventory/ Stock | 150,000 | 90,000 |
| Accounts Receivable | 48,000 | 70,000 |
| Cash | 22,000 | 50,000 |
| Profit & Loss | 10,000 | – |
| Total | 630,000 | 560,000 |
| Equities | ||
| Share capital | 500,000 | 400,000 |
| Accounts payable | 80,000 | 50,000 |
| Notes Payable | 50,000 | – |
| Profit and loss | – | 20,000 |
| Reserve fund | – | 90,000 |
| Total | 630,000 | 560,000 |
Required
1. Compute the purchase consideration,
Solution Answer
Alpha
Purchase Consideration
| Assets | |
| Machinery | 180,000 |
| Property | 190,000 |
| Patent | 30,000 |
| Inventory/ stock | 150,000 |
| Accounts receivable | 48,000 |
| Cash | 22,000 |
| Total assets | 620,000 |
| Less: Liabilities | |
| Accounts payable 80,000 | |
| Notes payable 50,000 | |
| Total liabilities | 130,000 |
| Purchase consideration | 490,000 |
| Shares received from new formed Gamma (490,000 / 10) | 49,000 |
Beta
Purchase Consideration
| Assets | |
| Machinery | 200,000 |
| Property | 150,000 |
| Inventory/ stock | 90,000 |
| Accounts receivable | 70,000 |
| Cash | 50,000 |
| Total assets | 560,000 |
| Less: Liabilities | |
| Accounts payable | 50,000 |
| Total liabilities | 510,000 |
| Purchase consideration | 490,000 |
| Shares received from new formed Gamma (510,000 / 10) | 51,000 |