Chapter 2, Problem 2.11.1P

To determine

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

To prepare: Value Analysis as well as Determination and distribution of excess schedule.

Answer to Problem 2.11.1P

  $\begin{array}{l}\text{Value Analysis 100\% 80\% 20\% }\\ \text{ Purchase Purchase NCI}\\ \text{Total Price paid 376000 300000 76000}\\ \left(\text{-}\right)\text{ Total fair value of Net Assets }\underset{\_}{\left(\text{380000}\right)}\underset{\_}{\text{(304000)}}\underset{\_}{\left(\text{76000}\right)}\\ \text{Gain 4000 4000 0}\end{array}$

Determination and distribution of excess schedule

  $\begin{array}{l}\text{Inventory 10000}\\ \text{Land 40000}\\ \text{Building 120000}\\ \text{Copyright 50000}\\ \text{Gain }\underset{\_}{\underset{\_}{(4000)}}\\ \text{Total 216000}\end{array}$

Explanation of Solution

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

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.

Calculations:

  $\begin{array}{l}\text{Value Analysis 100\% 80\% 20\% }\\ \text{ Purchase Purchase NCI}\\ \text{Total Price paid 376000 300000 76000}\\ \left(\text{-}\right)\text{ Total fair value of Net Assets }\underset{\_}{\left(\text{380000}\right)}\underset{\_}{\text{(304000)}}\underset{\_}{\left(\text{76000}\right)}\\ \text{Gain 4000 4000 0}\end{array}$

Determination and distribution of excess schedule

  $\begin{array}{l}\text{Inventory 10000}\\ \text{Land 40000}\\ \text{Building 120000}\\ \text{Copyright 50000}\\ \text{Gain }\underset{\_}{\underset{\_}{(4000)}}\\ \text{Total 216000}\end{array}$

  $\begin{array}{l}\text{Accounts receivables 20000}\hfill \\ \begin{array}{l}\text{Inventory 60000}\\ \text{Copyrights 50000}\end{array}\hfill \\ \begin{array}{l}\text{Building 270000}\\ \text{Land 80000}\\ \text{Equipments 40000}\\ \text{Total Assets (A) }\underset{\_}{\underset{\_}{520000}}\end{array}\hfill \\ \begin{array}{l}\\ \text{Total Liabilities }\\ \text{Current liabiliy 40000}\\ \text{Bond payable 100000}\\ \text{Total Liabilities (B) }\underset{\_}{\underset{\_}{40000}}\\ \text{Total net assets (A-B) =}\underset{\_}{\underset{\_}{380000}}\end{array}\hfill \\ \hfill \\ \hfill \end{array}$