Your supervisor asks you to analyze the potential purchase of Drew Company by your firm, Pierson, Inc. You are provided the following information (in million):
Pierson,Inc. Drew COMPANY
Historical Historical Fair
Cost Based Cost Based Value
Current Assets $70 $60 $65
Land 60 10 10
Buildings, net 80 40 50
Equipment, net 90 20 40
Total Assets $300 $130 $165
Current Liabilities $120 $20 $20
Shareholders' equity 180 110 -----
Total liabilities and equity $300 $130
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 using long term debt.
b. Discuss how differences between pooling and purchase accounting for acquisitions affect future reported earnings if the Pierson/Drew business combination.