Reference no: EM132772663

Big Co. acquires Little Co in a transaction to be accounted for as a merger. Little Co. has the following trial balance information at the date of acquisition:

                          Book value             Fair value
Cash                   10,000                 10,000
Inventory            18,000                  20,000
PPE                      400,000             300,000
Accumulated depreciation (120,000)
Goodwill 50,000
Accounts payable        30,000         30,000
Common stock 100,000
Retained earnings 228,000

Big Co gives the previous owners of Little 20,000 shares of their $1 par value common stock, valued at $17/share, for the acquisition. In addition to the immediate cash payment, Big also agrees to granting additional shares if certain sales growth targets are met after 3 years. The sales growth targets, the number of additional shares, and the estimated likelihood of hitting those targets is as follows:

Sales growth        Shares       Estimated likelihood
0-3%                      0                  30%
3.01 - 6%               2,000                 30%
6.01% - 9%             4,000               25%
9.01%+                  6,000                  15%

At the end of 3 years, actual sales growth came in at 5%. At that time (when the additional shares are issued) the share price is $22/share.

Problem 1: At the time of the acquisition, what is the expected value (# of shares) of the additional shares to be issued? (answer "xx,xxx shares")

Problem 2: What dollar value is assigned to these shares? (xx,xxx)

Problem 3: How much goodwill is recorded as part of this transaction? (xx,xxx)

Problem 4: When the additional shares are distributed after 3 years, what is the total value assigned to them? (the total credit to Common Stock and Paid in Capital in Excess of Par)