Pederson Company acquires the net assets of Shelby Company by issuing 100,000 of its $1 par value shares of common stock. The shares have a fair value of $20 each. Just prior to the acquisition,...

Pederson Company acquires the net assets of Shelby Company by issuing 100,000 of its $1 par value shares of common stock. The shares have a fair value of $20 each. Just prior to the acquisition, Shelby’s balance sheet is as follows: Fair values agree with book values except for the building, which is appraised at $450,000. The following additional information is available: • The equipment will be sold for an estimated price of $200,000. A 10% commission will be paid to a broker. • A major R&D project is underway. The accumulated costs are $56,000, and the estimated value of the work is $90,000. • A warranty attaches to products sold in the past. The estimated future repair costs under the warranty are $40,000. • Shelby has a customer list that has value. It is estimated that the list will provide additional income of $100,000 for three years. An intangible asset such as this is valued at a 20% rate of return. Record the acquisition of Shelby Company on the books of Pederson Company. Provide calculations where needed. View Solution:

Pederson Company acquires the net assets of Shelby Company by