The Gal Company

Questions 1, 2
On 1/1/2019, Tal Company buys 90% of the shares of Gal Company for a consideration with fair value of $900,000. At that time, the Gal Company owned a building with a net book value of $700,000 and a tax basis of $650,000. The tax rate is 20%.

1- Assume that the transaction is a taxable asset acquisition. At the time of the transaction, what is the balance of deferred taxes related to the building, on Tal’s consolidated financial statements?
2- Assume that the transaction is tax-free. What is the balance of deferred taxes related to the building, on GAL’s financial statements?
Questions 3-7
Sunglass Hut (the acquirer) has engaged your firm to analyse the prospect of acquiring RK, Inc., a wholly owned subsidiary of Consumer Devices, Inc. Consider the following relevant facts:
• RK has assets with net tax basis in RK of $800 million and Fair Market Value of $1,900 million, has no liabilities and is 100% owned by Consumer Devices.
• Consumer Devices has a tax basis in RK stock of $1,000 million.
• Sunglass Hut wants to acquire the stock of RK from Consumer Devices for $1,900 million in cash
• The corporate tax rate is 35%
• All answers should be in millions. For example, if you think the answer is $200 million, write 200 (only the number, nothing else).

3- Assume the transaction is structured as a taxable stock sale without a Section 338(h)(10) election. What tax basis in the assets of RK will Sunglass Hut have post acquisition?
4- As in Question 3, assume the transaction is structured as a taxable stock sale without a Section 338(h)(10) election. How much cash after tax will Consumer Devices have from the transaction?
5- Now assume instead that the transaction is structured as a taxable stock sale with a Section 338(h)(10) election. What tax basis in the assets of RK will Sunglass Hut have post acquisition?
6- As in Question 5, assume that the transaction is structured as a taxable stock sale with a Section 338(h)(10) election. How much cash after tax will Consumer Devices have from the transaction?
7- At what price is Consumer Devices indifferent between a stock sale with a Section 338(h)(10) and a stock sale without a Section 338(h)(10) election at a $1,900 million purchase price?

Questions 8, 9, 10
Answer questions 8-10 using the following information. You answer should be either YES or NO.
On 1 June 2019, XYZ Company forms NewCo and contributes to it $300,000 in cash for all the 1,000 shares issued by NewCo. In addition, NewCo borrows $250,000 from the bank. On 10 June 2019, NewCo acquires all the shares of the WWW Corporation for $550,000 in cash. WWW applies pushdown accounting.

8- The bank requires that WWW Corporation be named as a legal obligor for the debt. Should the WWW Corporation record the debt on its balance sheet? (Yes/No)

9- The bank requires that NewCo’s shares in WWW would serve as a collateral for the debt. Should the WWW Corporation record the debt on its balance sheet? (Yes/No)

10- The bank requires that the buildings and inventory of the WWW Corporation will serve as a collateral for the debt. Should the WWW Corporation record the debt on its balance sheet? (Yes No)

Questions 11, 12
Answer Questions 11-12 using the following information. Remember: Round your answer to the nearest figure. If, for example, your answer is 45.54%, write 46. If your answer is -2.32% write -2.
The Marco company reported the following information in its financial statements for the year ended 31 December 2019 (all figures are in thousands of US dollars):

Consolidated Income Statement
As reported
$(000) Year ended 31/12 Year ended 31/12 Year ended 31/12
2019 2018 2017
Sales 17,000 19,000 13,000
Net Income 2,500 3,000 2,000

In addition, the notes to the financial statements included the following information:
“On July 1, 2018, we completed the acquisition of the Bergamo Corporation for a cash consideration of $80,000. The Bergamo Corporation contributed $4,000 and $1,000 to the sales and net income for the year ended 31/12/2018, and $5,000 and $2,000 to the sales and income for the year ended 31/12/2019.”

11- What is Organic Sales Growth in 2018 is?

12- What is Organic Income Growth in 2019?

Questions 13-17
Answer questions 13-17 using the following information

On January 1st, 2020, ELI Company acquires 60% of the common stock of AMIR Company from existing shareholders for £300,000 in cash. Assume that there are no fair value adjustments, and the difference between consideration and book values are attributed to goodwill. ELI Company uses its available cash balance to fund the deal. Here are the balance sheets of TAL and GAL just before the deal.

Pre-deal (£/000) ELI AMIR
Cash 450,000 100,000
Other current assets 50,000 220,000
Non-current assets 550,000 350,000
Total Assets 1,050,000 670,000
Current liabilities 250,000 120,000
Long-term debt 550,000 225,000
Share capital 100,000 100,000
Retained earnings 150,000 225,000
Total Liabilities and Equity 1,050,000 670,000

13- Given the details in the question, how much will be included in “Cash Flow from Investing Activities” regarding this acquisition?

14- Under the partial method of goodwill and non-controlling interests, what is the amount of goodwill in the transactions?

15- Under the partial method of goodwill and non-controlling interests, what is the amount of non-controlling interests in the transactions?

16- Under the full method of goodwill and non-controlling interests, what is the maximum amount of goodwill in the transactions?

17- Under the full method of goodwill and non-controlling interests, what is the maximum amount of non-controlling interests in the transactions?

Questions 18, 19, 20
Answer Questions 18-20 using the following information

Here is an acquisition in three steps. Always use the partial method for goodwill and non-controlling interests.

Step 1: On 1 January 2017, AMIR purchases 5% of TALGAL for £60m. At this date, the summarised balance sheet of TALGAL is:

 £m

Net assets 500
Share capital (100)
Retained profit (400)

This balance sheet does not include an intangible asset with a fair value of £150m. The summarised profit and loss account of TALGAL for the year ended 31/12/2017:

 £m

Profit after tax 200
Dividends (80)
Retained profit for the year (120)

Step 2: On 1 January 2018 – when the fair value of the existing investment is £75 and the fair value of the intangible asset has increased to £380m, AMIR purchases a further 55% of TALGAL for £800m. The summarised profit and loss account of TALGAL for the year ended 31/12/2018:

 £m

Profit after tax 570
Dividends (180)
Retained profit for the year (390)

Step 3: Finally, on 1 January 2019, when the fair value of the existing investment in TALGAL is £1,600 and the fair value of the intangible asset has increased to £490m, AMIR purchased the remaining 40% of TALGAL for £950m.

In £m 1.1.17 1.1.18 1.1.19
Purchase % 5% 55% 40%
Consideration 60 800 950
FV of existing investment 0 75 1,600
FV of Intangible 150 380 490
BV of Net Assets 500 620 1,010

18- What is the total amount of gains/losses recorded in the profit and loss account as a result of this acquisition? Consider all steps.

19- What is the total amount of goodwill recorded in the acquisitions? Consider all steps.

20- What is the amount of non-controlling interests on 1/1/2019 just prior to the third step?

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