Chapter 1, Problem 1A.1.2AP

To determine

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

To Prepare: The journal entry for acquisition.

Answer to Problem 1A.1.2AP

  $\begin{array}{l}\text{Cash and receivables Dr}\text{. 150000}\hfill \\ \text{Cash Dr}\text{. 200000}\hfill \\ \begin{array}{l}\text{Building Dr}\text{. 450000}\\ \text{Land Dr}\text{. 100000}\\ \text{Goodwill Dr}\text{. }385790\\ \text{ To Current liabilities 120000}\\ \text{ To 9\% Bond payable 300000}\\ \text{ To Interest on Bond 27000}\\ \text{ To Purchase Consideration 838790 }\end{array}\hfill \\ \hfill \\ \hfill \\ \hfill \end{array}$

Explanation of Solution

Concept Used:

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: this is the date that the acquiring firms makes payment by transferring assets, issuing stock, and assuming the liabilities 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.

Estimation of goodwill can be done by many methods

1. By yeas of excess earning
2. By excess earning continue indefinitely
3. By excess earning continue for particular years on annuity

Calculation

  $\begin{array}{l}\text{Total Assets }\\ \begin{array}{l}\text{Cash and receivables 150000}\hfill \\ \text{Inventory 200000}\hfill \\ \begin{array}{l}\text{Building(net) 450000}\\ \text{Land }\underset{\_}{\text{100000}}\\ \text{Total Assets (A) }\underset{\_}{\underset{\_}{900000}}\end{array}\hfill \\ \begin{array}{l}\\ \text{Total Liabilities }\\ \text{Current liabilities 120000}\\ \text{9\% Bond payable 300000}\\ \text{Interest payable 27000}\\ \text{Total Liabilities (B) }\underset{\_}{\underset{\_}{447000}}\\ \text{Total Net Assets (A-B) =}\underset{\_}{\underset{\_}{453000}}\end{array}\hfill \\ \hfill \\ \hfill \end{array}\end{array}$

  $\begin{array}{l}\text{Expected average future income} \text{= 150000}\hfill \\ \left(\text{-}\right)\text{ Normal return on assets } \text{= }\underset{\_}{\left(\text{45300}\right)}\hfill \\ \text{Expected normal earning in access of normal} \text{= 104700}\hfill \end{array}$

Excess earning continues for $5$ years

Goodwill= discounted present valued of $104700$ per year annuity for $5$ years at $16\%$

  $\begin{array}{l}=104700\text{ x }5\text{ years},16\%\text{ present value of annuity factor}\\ = 104700\text{}\text{ x }3.6847 \\ =\text{ 385790}\end{array}$