Bass Industries BI is a large public company with its
Bass Industries (BI) is a large public company with its head office located in Canada that prints and sells published goods, such as books and magazines, all over the world. As part of its business strategy, Bass operates each product as a separate company that is run independently and it has an investment in them of varying levels. BI is hoping to expand in the near future by looking for additional bank financing and issuing additional shares. The bank has indicated that it will be concerned with BI’s level of debt, the need to minimize its debt-to-equity ratio, and the need to ensure that the net income level is at least maintained in the future.
During the year, BI bought all 1 million of the outstanding shares of another publishing company, Thorpe Industries (TI),that had been suffering difficulties due to a decreased demand in published products. Revenues have stabilized and customers have started to not renew their subscriptions to TI’s published materials. BI had hopes of turning it around, integrating it within its existing products, and using economies of scale to lower costs. BI paid $5.60 per share to acquire all of the outstanding shares of TI, to be paid over the next two years. In addition, if net income exceeds $2 million in each of the next five years, it will make an additional payment to the former shareholders of TI for $0.25 per share. BI made the offer to purchase TI’s shares on May 1, 2013. The price was to be based on TI’s June 30, 2013, audited financial statements with the payment to be made on that day, when BI will then be incorporating TI’s operations with its own. The tax rate is 40%.
You, CA, are the controller of BI and have been asked by the VP Finance to prepare a report discussing the implications of the acquisition. The VP would like know your thought process for your conclusions and recommendations. You have been supplied with TI’s balance sheet as of June 30, 2013, and that of the prior year.
TI’s net income was $1,014,000 this past year and $962,000 the year before.
The carrying values of TI approximate their fair values, except for property, plant, and equipment (which has a remaining useful life of five years) being higher by $199,000, long-term debt (which is to be paid in three years) being higher by $172,000, and prepaid expenses being lower by $27,000.
In addition, TI had subscriber lists that were not recognized on its balance sheet. One expert placed a value on them of $825,000. If BI were to incur these costs itself, it would have cost $950,000. During the due diligence process,
TI disclosed that it had spent $895,000 over the past two years on these subscriber lists. BI expects to use these lists over the next five to seven years. TI had expected to benefit from these subscriber lists over the next three to five years.
Acquisition-related costs incurred by BI included lawyers’ fees of $150,000 and valuation consultant fees of $200,000, which the VP Finance would like to capitalize to help adhere to the debt-to-equity ratio.
Prepare the report requested by the VP Finance.
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