Reference no: EM132640449

Question - Tom's Tractor Supply (Tom's) is one of the largest manufacturers and vendors of farm equipment and products in the Midwest. They manufacture and sell many products needed for farm life, including tools, hardware, power equipment, livestock maintenance material, animal containment facilities, lawn care, clothing, etc. To increase its market share and become the largest manufacturer/dealer in the Midwest, they engaged in two acquisitions.

First, Tom's purchased all shares of the Rural Life Supply Co. (RLS), a company that manufactures power farming equipment and power tools, for $150 million, which exceeds the book value by $33 million.

RLS has 2 exclusive contracts, one with Farming Depot and one with Cattle Callers.

- The contract with Farming Depot is for RLS to be the exclusive provider of farming power equipment. However, there is not a contract for the supply of power tools to Farming Depot even though routine purchases exist. Both Tom's Tractor Supply and RLS believe that there is only one overall customer relationship between Farming Depot and RLS. There is an expectation that the contract will be renewed.

- The contract with Cattle Caller is for RLS to be the exclusive provider of power tools for the Company. However, they do not have an exclusive contract to supply farming power equipment, even though RLS has a backlog of orders that are scheduled to be produced during the upcoming year. Both Tom's Tractor Supply and RLS believe that there is only one overall customer relationship between Cattle Caller and RLS.

RLS is especially attractive as an acquisition because it has contracts with several prominent customers in the agricultural industry. It also has valuable customer lists that contain important customer contact information. Approximately half of the lists have confidentiality agreements attached to them.

Tom's also transferred its clothing factory equipment to Simplicity Manufacturing Company (SMC) in exchange $1 million cash and SMC's lawn mowing production equipment. Tom's book basis in the transferred equipment was $6 million, and the equipment was recently appraised for $6.5 million. The fair value of SCM's equipment is $5.5 million, and this fair value was reliably determined.

SMC has decided to focus strictly on manufacturing work apparel and accessories. SMC will use the equipment to expand its construction workwear and jeans production. Prior to transferring the equipment, Tom's used the equipment to produce farming workwear. However, significant overseas competition caused profit margins and demand for the domestic production of farm apparel to fall. Production using the equipment had recently been cut down to only 1 x 8-hr shift per day. Construction work wear and jeans are expected to be a more profitable output, with steady consumer demand. SMC expects to run the equipment for 3 x 8-hr shifts per day.

Case Requirements - Our firm has been asked for assistance in researching the results of the transactions for Tom's Tractor Supply. Please write a memo to me (your manager), including the relevant facts and a formal statement of the issues. Thoroughly discuss the provisions of the applicable financial accounting authorities and the conclusions that you have reached.