Question: Two Hollywood companies had the following balance sheet accounts as

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 wasmaintained?
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  • CreatedNovember 19, 2014
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