Two Hollywood companies had the following balance sheet accounts as of December 31, 20X7 ($ in millions):

	Lexia	Hudson Productions		Lexia	Hudson Productions
Cash and receivables	$ 60	$ 44	Current liabilities	$ 100	$ 40
Inventories	240	6	Common stock	200	20
Plant assets, net	300	190	Retained earnings	300	180
Total assets	$600	$240	Total liab. and stk. eq.	$ 600	$240
Net income for 20X7	$ 38	$ 8

On January 4, 20X8, these entities combined. Lexia issued $360 million of its shares (at market value) in exchange for all the shares of Hudson, a motion picture division of a large company. The inventory of films acquired through the combination had been fully amortized on Hudson’s books.

During 20X8, Hudson received revenue of $42 million from the rental of films from its inventory. Lexia earned $40 million on its other operations (i.e., excluding Hudson) during 20X8. Hudson broke even on its other operations (i.e., excluding the film rental contracts) during 20X8.

1. Prepare a consolidated balance sheet for the combined company immediately after the combination. Assume $160 million of the purchase price was assigned to the inventory of films. The fair values of all other Hudson assets and liabilities were equal to their book values.
2. Prepare a comparison of Lexia’s consolidated net income between 20X7 and 20X8, 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 20X8 if the $160 million were assigned to goodwill instead of the inventory of films and goodwill was not amortized?

Answer rating: 100% (QA)

Part 1 The consolidated balance sheet is prepared as below Consolidated Balance Sheet Cash and Recei... View the full answer