Question: Allocating Total Purchase Price to Assets Two Hollywood companies had the following balance sheet accounts as of December 31, 20X0, and net income for 20X0 (in millions):
On January 4, 20X1, these firms merged. LA issued $180 million of its shares (at market value) in exchange for all the shares of Beverly, a motion picture division of a large company. The inventory of films acquired through the combination had been fully amortized on Beverly's books. During 20X1, Beverly received revenue of $16 million from the rental of films from its inventory. LA earned $20 million on its other operations (i.e., excluding Beverly) during 20X1. Beverly broke even on its other operations (i.e., excluding the film rental contracts) during 20X1.
1. Prepare a consolidated balance sheet for the combined company immediately after the combination. Assume that $80 million of the purchase price was assigned to the inventory of films.
2. Prepare a comparison of LA's net income between 20X0 and 20X1 where the cost of the film inventories would be amortized on a straight-line basis over 4 years. What would be the net income for 20X1 if the $80 million were assigned to goodwill rather than to the inventory of films and the value of goodwill was maintained?