Merger and Debt Restructuring in Corporate Accounting

Case 3-6 To: President, Planet Publishing Limited From: Jaskaranjit Gill, CPA Below I have attached the report that you had requested to be prepared in regards to the merger of Space Communications Ltd. and Planet Publishing Limited. Planet's banker had made the following loans: -$1,000,000 demand loan -$2,000,000 term loan With the bank providing and extending the loans, they have also provided Planet the covenants which they are required to cohere to. Planet is required to focus on specific accounts which are connected to the application of their loans. These accounts include receivables, inventory as well as registered debentures on all encumbered assets of Planet. The debt to equity levels are an important factor as it will also be used to assess the loans from the banks perspective. Planet's primary goal would be to prepare statements that display a position that shows the maximized receivables and inventory numbers. Merger Accounting Treatment The method of accounting that should be used for the merger is the acquisition method. All assets acquired by Planet are to be recorded at fair value. Any assets and information that is being acquired needs to be fully disclosed. Planet is not a publicly traded company which makes it difficult to figure out the fair value of the shares issued. Due to this, the next option would be to use the fair value of assets of Space. The shares have been distributed in a way that 25% of the Space are previous shareholders. Ideally, Planet would want to maximize the amount allocated to the 25% of shares so it would assist with decreasing debt-to-equity ratios. Planet should only expense the acquisition of Space which may include employee layoff costs as well as anything in relation to the offices owned by Space. They should also expense any direct costs of the acquisition. Debt Restructuring As a part of the merger, the debt restructuring that occurred can be accounted for as part of the acquisition. By revaluing the liabilities, it would result in the adjustment of liabilities and the residual value of goodwill. There was an accounts payable balance of $320,000 which was converted into a two-