On October 15, 1988, the Intermast Corporation initiated an acquisition of the Coko Corporation. The acquisition is an effort by Intermast to expand its operations into new markets with long-term growth prospects.

The Coko Corporation, situated in Geneva, Switzerland, is a closely held engineering and consulting firm with extensive expertise in the design and construction of ski lift equipment. It was spun-off by temporarily cash hungry Bavarian Manufacturing in 1984, and has been in operation independently since that time. The company's past dividend policy has been to pay 35% of net earnings out to shareholders each year. As of April 28, 1989, 1,700,000 shares of Coko stock currently were outstanding (see Exhibit 2 for Coko Financial Statements).

The Intermast Corporation is a large, diversified real estate concern based in Teaneck, New Jersey, and founded in 1965. The company has been very profitable in the past decade due to the rising value of its real estate holdings in northern New Jersey. The company is particularly well known for its expertise in the development of golf courses and resort facilities.

In an effort to invest its excess cash and maintain business relationships with subcontractors, Intermast currently holds long-term investments in several outside companies (see Exhibit 1 for specific holdings). The company's historical dividend policy has been to pay out 30% of net earnings each year. On April 28, 1989, the number of shares of Intermast common stock outstanding stood at 1,310,000 (see Exhibit 1 for Intermast Financial Statements).

The merger of Intermast and Coko was completed with the exchange of common stock on April 28, 1989. This involved the exchange of 1,650,000 shares of Coko stock for 825,000 shares of Intermast's stock. Coko insiders held 60% of the outstanding common stock of the company and they received 495,000 shares of Intermast common stock in exchange for their shares. No special allowances or incentives were provided to any subset of the stockholders of the new company.

Sometime in the next year, once a buyer can be found, the Intermast Company plans to sell $9 million in property that was being held for development of new offices by the Coko Company prior to the combination. Intermast management announced that there are currently no plans to acquire any Intermast stock in the future and that all new stock issued to former Coko stockholders would be immediately exercisable and would carry all of the rights of existing Intermast stock.

Exhibit 1

Exhibit 2

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QUESTIONS

(1) Should the business combination be accounted for as a purchase or a pooling of interests?

(2) Explain the basis for your decision as stated above (be sure to cover all criteria considered in the decision).

Consider each of the following scenarios independent of the other.

(3) Due to a miscalculation of the stockholdings stated above, a re-evaluation of the combination may be necessary. It was recently determined that Coko insiders actually held only 50% of the outstanding company stock. You still need to analyze criteria #2, #4, and #7, but all other criteria qualify for the pooling of interests method. Determine if this new information would affect any of the remaining criteria and what effects, if any, it would have.

(4) On 10/20/88, Intermast Corp. declared a dividend of $5.25/share on reported earnings of $18,150,000. You still need to analyze criteria #4, #5, and #6, but all other criteria qualify for the pooling of interests method. Determine whether or not this action would make a difference in the remaining criteria and explain what effects, if any, it might have.