Your supervisor asks you to analyze the potential purchase of Drew Company by your firm, Pierson, Inc. You are provided the following information (in millions):

Required:

a. Prepare a pro forma combined balance sheet using purchase accounting. Note that Pierson pays $180 million in cash for Drew where the cash is obtained by issuing long-term debt.

b. Discuss how differences between pooling and purchase accounting for acquisitions affect future reported earnings of the Pierson/Drew business combination.
(CFAAdapted)

Transcribed Image Text:

DREW COMPANY Pierson, Inc., Historical Cost-Based Fair Cost-Based Value Current assets. Land.. 70 Equipment, net Total assets.. . . Current liabilities Shareholders' equity. Total liabilities and equity. $300 $130 165 $120 180 300 20