Problem - Dobranic Ltd. is a search firm that specializes on finding and placing mid-level executives into various companies. Dobranic Ltd. is based in Chicago, Illinois and has three other offices in the United States. Dobranic Ltd. has seen increased demand for their search services and their new clients have significant international subsidiaries. In order to continue to grow with these new clients, Dobranic Ltd. had entered into a purchase agreement with Guyer Search based in Los Angeles, California. Guyer Search is owned by 10 partners equally and they specialize on placing the same types of search candidates as Dobranic Ltd. Dobranic Ltd. and Guyer Search both have December 31st year-ends.
On the close of business March 31, 2012, the two companies consummated their agreement whereby Dobranic Ltd. would purchase Guyer Search's common stock for $5,000,000 in cash and a $5,000,000 note payable to the sellers of Guyer Search.
The note payable to the sellers of Guyer Search will be paid off in equal annual payments of $2,500,000 on April 1, 2013 and April 1, 2014.
In order to finance this transaction, Dobranic Ltd., as the borrower, obtained a $10,000,000 acquisition line of credit from a financial institution, which is to be repaid in equal monthly installments over 10 years, plus interest at 8%.
Each of the selling partners entered into employment agreements with Dobranic Ltd. once the sale was finalized. The employment agreement is for three years and includes a non compete clause that allows Dobranic Ltd. to withhold a portion of the note payable payments if a partner voluntarily leaves within the three year time period of their employment agreement. Dobranic Ltd. can terminate any partner for cause. The amount of the note payable that could be withheld, by partner, is as follows:
- If a partner leaves within the first year, $750,000.
- If a partner leaves within the second year, $500,000.
- If a partner leaves within the third year, $250,000.
If a partner leaves and Dobranic Ltd. withholds the appropriate amount from the note payment, the remaining partners can use any means necessary to collect the amounts not paid by Dobranic Ltd. due to the partner leaving the firm.
Dobranic Ltd. engaged an appraiser to determine the fair value of the assets purchased from Guyer Search. Guyer Search's assets were valued as follows:
- Equipment (5 year remaining life) $ 200,000
- Customer relationships $ 1,500,000
- Tradename $ 100,000
Dobranic Ltd. did not attribute any value to the non-compete agreements because legal counsel has informed Dobranic Ltd. that non-compete agreements are unenforceable in California.
The fair market value of all other assets and liabilities of Guyer Search, not identified above, are assumed to be the same as their current carrying value as of March 31, 2012. Guyer Search's effective tax rate is 40%.
Guyer Search's March 31, 2012 balance sheet is attached as Appendix A of this case and Guyer Search's December 31, 2012 balance sheet and income statement before any purchase accounting entries is attached as Appendix B.
1. Compute the purchase price of this transaction.
2. Please prepare Guyer Search's opening balance sheet as of April 1, 2012, including any adjustments necessary to the March 31, 2012 closing balance sheet.
3. Please prepare Guyer Search's December 31, 2012 income statement and balance sheet including any adjustments necessary for the purchase by Dobranic Ltd.
Attachment:- Assignment File.rar