The subjoined balance sheets show the conditions of the two companies. The balance sheet of the Randall Co. has already been adjusted to meet the conditions of the merger. The agreement provided, however, that the machinery and tools of the Strong Co. should be taken over at a 10% reduction of their present book valuation; that the book value of the Special War Plant assets be written up $20,000 on account of their adaptability to the regular needs of the merger; and that the reserve for bad debts be increased to $5,000. The surplus, after these adjustments, was reduced to even multiples of $10,000.
A. M. Strong Fiber Co.
Balance Sheet, December 31, 1916
| Assets | Liabilities and Capital | ||
| Machinery | $ 60,000.00 | Notes Payable | $ 10,000.00 |
| Tools | 4,000.00 | Accounts Payable | 75,000.00 |
| Furniture and Fixtures | 7,500.00 | Reserve for Bad Debts | 3,000.00 |
| Good-Will | 150,000.00 | Depreciation Reserve | |
| Raw Materials | 75,000.00 | for Machinery | 7,000.00 |
| Cash | 25,000.00 | Depreciation Reserve | |
| Notes Receivable | 47,500.00 | for Furn. and Fixt. | 1,500.00 |
| Accounts Receivable | 112,500.00 | Depreciation Reserve | |
| Special War Plant | 130,000.00 | for War Plant | 50,000.00 |
| Bonds Payable (6%) | 100,000.00 | ||
| War Munition Bonds (7%) | 60,000.00 | ||
| Reserve for Sinking Fund | 30,000.00 | ||
| Capital Stock, Common | 150,000.00 | ||
| Capital Stock, Preferred (6%) | 100,000.00 | ||
| Surplus | 25,000.00 | ||
| $611,500.00 | $611,500.00 | ||
Randall Manufacturing Co.
Balance Sheet, December 31, 1916
| Assets | Liabilities and Capital | ||
| Land | $ 90,000.00 | Accounts Payable | $ 35,800.00 |
| Machinery | 70,000.00 | Notes Payable | 20,000.00 |
| Tools | 10,000.00 | Wages Payable | 2,000.00 |
| Motor Trucks | 12,000.00 | Interest Accrued | 1,000.00 |
| Furniture and Fixtures | 3,000.00 | Reserve for Bad Debts | 1,200.00 |
| Patents | 60,000.00 | Bonds Payable (5%) | 100,000.00 |
| Raw Material | 14,000.00 | Capital Stock, Preferred | 50,000.00 |
| Goods in Process | 8,000.00 | Capital Stock, Common | 100,000.00 |
| Finished Goods | 19,000.00 | Surplus | 40,000.00 |
| Cash | 8,000.00 | ||
| Notes Receivable | 16,000.00 | ||
| Accounts Receivable | 40,000.00 | ||
| $350,000.00 | $350,000.00 | ||
To effect the reduction of the surplus of the Strong Co. to even multiples of $10,000, by consent of all the stockholders, a special dividend was declared to be shared by both common and preferred stockholders equally on the basis of their respective holdings; and it was further agreed that because the preferred stock carried a participation privilege and preference as to assets, in the distribution of the stock of the merger in payment of the respective interests of the present stockholders, the preferred holders should be considered as being entitled to a pro rata share of the adjusted surplus and good-will.
The net profits for the last period, after deduction therefrom of 8% interest on the respective capitals as adjusted by taking effect of the foregoing items, were capitalized in even thousands of dollars on a 20% basis, to determine the value of the good-will of the two companies; the good-will of the Strong Co. so determined to be in addition to its present good-will. It was ascertained that the net profits for the last period were: Strong Co. $41,750, Randall Co., $30,000.
To carry out the plan of the merger, the Sterling Trunk Corporation was organized with sufficient capital in 7% cumulative preferred stock and common stock to acquire the two other companies, and additional common—to remain unissued for the present—to bring the total capitalization to $750,000.
(a) Submit a statement showing the capitalization of the Sterling Trunk Corporation and the distribution of the capital stock to the other companies.
(b) Prepare the balance sheet of the Sterling Trunk Corporation as of December 31, 1916.