Chapter 1, Problem 1.7.2P

To determine

Introduction: Acquisition is a corporate term used to represent purchase of another company and gaining the ownership of the company.

To show: Acquisition with contingent consideration.

Answer to Problem 1.7.2P

No entry will be passed because the probability is 90%.

Explanation of Solution

Acquisition is a corporate term to define buying all of another company and gain the ownership of the company.

There are four steps in acquisition of company

1. Identify the Acquirer
2. Determine the acquisition date
3. Measure the fair value of acquiree
4. Record the acquiree’s assets and liabilities that are assumed.

Identify the acquirer: for acquisition it is very important for acquiree’s to know the acquirer.

Following things should be kept in mind voting rights, large minority interest, governing body of combined entity and terms of exchange.

Determine the acquisition date of the company.

Measures the fair value of acquiree: the fair value of the aquiree as an entity is assumed to be paid by the acquirer. The price includes the contingent consideration, the costs of acquisition are not included in the price of the company acquired and expended.

Record acquiree’s assets and liabilities that are assumed: the fair value of all identifiable assets and liabilities of the acquire are determined and recorded.

Goodwill results when the price paid exceeds the fair value of net assets. Gain results when the price paid is less than the fair value of net assets.

Contingent consideration: contingent consideration is consideration given on the happening or non-happening of event. It is generally added in purchase consideration and increase goodwill.

Calculation:

  $\begin{array}{l}\text{Total Assets }\\ \begin{array}{l}\text{NR 33000}\hfill \\ \text{Inventory 80000}\hfill \\ \text{Prepaid Expenses 15 000}\hfill \\ \begin{array}{l}\text{Building 170000}\\ \text{Land 90000}\\ \text{Equipments 250000}\\ \text{Vehicles 25000}\\ \text{Franchise 70000}\\ \text{Investment }\underset{\_}{\text{55000}}\\ \text{Total Assets (A) }\underset{\_}{\underset{\_}{\text{ 788000 }}}\end{array}\hfill \\ \hfill \\ \hfill \end{array}\\ \text{Total Liabilities }\\ \text{Accounts payable 63000}\\ \text{Taxes payable 15000}\\ \text{Interest payable 3000}\\ \text{Bonds payable (net) }\underset{\_}{\text{ 220000}}\\ \text{Total Liabilities (B) }\underset{\_}{\underset{\_}{\text{ 3}01000}}\end{array}$

Total Net Assets (A-B) 487000

Value Analysis

Total Price paid

575000

(-) Total fair value of Net Assets (487000)

Goodwill 88000

Journal Entry

  $\begin{array}{l}\text{Notes Receivable Dr}\text{. 33000}\hfill \\ \text{Inventory Dr}\text{. 80000}\hfill \\ \text{Prepaid Expenses Dr}\text{. 15 000}\hfill \\ \begin{array}{l}\text{Building Dr}\text{. 170000}\\ \text{Land Dr}\text{. 90000}\\ \text{Equipments Dr}\text{. 250000}\\ \text{Vehicles Dr}\text{. 25000}\\ \text{Franchise Dr}\text{. 70000}\\ \text{Investment Dr}\text{. 55000}\\ \text{Goodwill Dr}\text{. 55000}\\ \text{ To Accounts payable 63000}\\ \text{ To Taxes payable 15000}\\ \text{ To Interest payable 3000}\\ \text{ To Bonds payable 220000}\\ \text{ To Purchase Consideration 525000}\\ \text{ To Contingent Consideration 575000 }\end{array}\hfill \\ \hfill \\ \hfill \end{array}$