Question: Sentry, Inc., acquires for $2,300,000
Sentry, Inc., acquires for $2,300,000 in cash, the net assets of New Equipment Company. The acquisition is made on December 31, 2015, at which time New Equipment has prepared the following balance sheet:
The following information is available concerning the assets and liabilities of New Equipment:
a. Current assets and liabilities are stated fairly. No payments resulting from leases are included in current accounts, since all payments are due each December 31 and payment for 2015 has been made.
b. Assets under operating leases have an estimated value of $580,000. This figure includes consideration of remaining rents and the value of the assets at the end of the lease terms.
c. The net investment in direct financing leases represents receivables at their discounted present values. All leases except one are based on the current market interest rate of 12%. One equipment lease is included at an amount of $199,636. This lease includes five and of the year payments of $50,000 present valued at an 8% interest rate. This lease should be adjusted to its real fair value using a 12% annual interest rate.
d. The buildings and land have appraised fair values of $400,000 and $100,000, respectively.
e. The leased equipment under the capital lease pertains to a computer used by New Equipment. The obligation under the capital lease of equipment includes the present value of five remaining payments of $9,233 due at the end of each year and discounted at 10%. Title transfers to the lessee at the end of the lease term. The current interest rate for this type of transaction is 12%. The fair value of the equipment under the lease is $60,000.
f. New Equipment has expended $100,000 on R&D leading to new equipment applications. Sentry estimates the value of this work to be $200,000.
g. New Equipment has been named in a $200,000 lawsuit involving an accident by a lessee using its equipment. It is likely that New Equipment will be found liable in the amount of $50,000.
Required
Record the acquisition of New Equipment Company by Sentry, Inc. Carefully support your entry. You may assume that the price will allow goodwill to be recorded.
Transcribed Image Text:
New Equipment Company Balance Sheet December 31, 2015 Assets Liabilities and Equity $ 100,000 Current liabilities ... 520,000 Obligation under capital lease of equipment 730,000 Common stock ($5 par).. 150,000 35,000 100,000 400,000 955,000 Current assets Assets under operating leases. Net investment in direct financing (capital leases). Paid-in capital in excess of par Leased equipment under capital lease (net). . Buildings (net) 40,000 Retained earnings.. 200,000 50,000 Land..... Total assets. $1,640,000 Total liabilities and equity $1,640,000
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