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Chapter 02 – Consolidation of Financial Information
2-1
CHAPTER 2
CONSOLIDATION OF FINANCIAL INFORMATION
Major changes occurred for financial reporting for business combinations beginning in 2009.
These changes are documented in FASB ASC Topic 805, ―Business Combinations‖ and Topic
810, ―Consolidation.‖ These standards require the acquisition method which emphasizes
acquisition-date fair values for recording all combinations.
In this chapter, we first provide coverage of expansion through corporate takeovers and an
overview of the consolidation process. Then we present the acquisition method of accounting for
business combinations followed by limited coverage of the purchase method and pooling of
interests provided in the Appendix to this chapter.
Chapter Outline
I. Business combinations and the consolidation process
A. A business combination is the formation of a single economic entity, an event that
occurs whenever one company gains control over another
B. Business combinations can be created in several different ways
1. Statutory merger—only one of the original companies remains in business as a
legally incorporated enterprise.
a. Assets and liabilities can be acquired with the seller then dissolving itself as a
corporation.
b. All of the capital stock of a company can be acquired with the assets and
liabilities then transferred to the buyer followed by the seller’s dissolution.
2. Statutory consolidation—assets or capital stock of two or more companies are
transferred to a newly formed corporation
3. Acquisition by one company of a controlling interest in the voting stock of a
second. Dissolution does not take place; both parties retain their separate legal
incorporation.
C. Financial information from the members of a business combination must be
consolidated into a single set of financial statements representing the entire economic
entity.
1. If the acquired company is legally dissolved, a permanent consolidation is
produced on the date of acquisition by entering all account balances into the
financial records of the surviving company.
2. If separate incorporation is maintained, consolidation is periodically simulated
whenever financial statements are to be prepared. This process is carried out
through the use of worksheets and consolidation entries. Consolidation
worksheet entries are used to adjust and eliminate subsidiary company accounts.
Entry ―S‖ eliminates the equity accounts of the subsidiary. Entry ―A‖ allocates
exess payment amounts to identifiable assets and liabilities based on the fair
value of the subsidiary accounts. (Consolidation journal entries are never
recorded in the books of either company, they are worksheet entries only.)
Chapter 02 – Consolidation of Financial Information
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II. The Acquisition Method
A. The acquisition method replaced the purchase method. For combinations resulting in
complete ownership, it is distinguished by four characteristics.
1. All assets acquired and liabilities assumed in the combination are recognized and
measured at their individual fair values (with few exceptions).
2. The fair value of the consideration transferred provides a starting point for valuing
and recording a business combination.
a. The consideration transferred includes cash, securities, and contingent
performance obligations.
b. Direct combination costs are expensed as incurred.
c. Stock issuance costs are recorded as a reduction in paid-in capital.
d. The fair value of any noncontrolling interest also adds to the valuation of the
acquired firm and is covered beginning in Chapter 4 of the text.
3. Any excess of the fair value of the consideration transferred over the net amount
assigned to the individual assets acquired and liabilities assumed is recognized by
the acquirer as goodwill.
4. Any excess of the net amount assigned to the individual assets acquired and
liabilities assumed over the fair value of the consideration transferred is
recognized by the acquirer as a ―gain on bargain purchase.‖
B. In-process research and development acquired in a business combination is
recognized as an asset at its acquisition-date fair value.
III. Convergence between U.S. GAAP and IAS
A. IFRS 3 – nearly identical to U.S. GAAP because of joint efforts
B. IFRS 10 – Consolidated Finanical Statements and IFRS 12 – Disclosure of Interests
in Other Entities both become effective in 2013. Some differences between these
and GAAP
APPENDIX:
The Purchase Method
A. The purchase method was applicable for business combinations occurring for fiscal
years beginning prior to December 15, 2008. It was distinguished by three
characteristics.
1. One company was clearly in a dominant role as the purchasing party
2. A bargained exchange transaction took place to obtain control over the second
company.
3. A historical cost figure was determined based on the acquisition price paid.
a. The cost of the acquisition included any direct combination costs.
b. Stock issuance costs were recorded as a reduction in paid-in capital and are
not considered to be a component of the acquisition price.
B. Purchase method procedures
1. The assets and liabilities acquired were measured by the buyer at fair value as of
the date of acquisition.
2. Any portion of the payment made in excess of the fair value of these assets and
liabilities was attributed to an intangible asset commonly referred to as goodwill.
Chapter 02 – Consolidation of Financial Information
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3. If the price paid was below the fair value of the assets and liabilities, the accounts
of the acquired company were still measured at fair value except that the values of
certain noncurrent assets were reduced in total by the excess cost. If these values
were not great enough to absorb the entire reduction, an extraordinary gain was
recognized.
The Pooling of Interest Method (prohibited for combinations after June 2002)
A. A pooling of interests was formed by the uniting of the ownership interests of two
companies through the exchange of equity securities. The characteristics of a pooling
are fundamentally different from either the purchase or acquisition methods.
1. Neither party was truly viewed as an acquiring company.
2. Precise cost figures stemming from the exchange of securities were difficult to
ascertain.
3. The transaction affected the stockholders rather than the companies.
B. Pooling of interests accounting
1. Because of the nature of a pooling, determination of an acquisition price was not
relevant.
a. Since no acquisition price was computed, all direct costs of creating the
combination were expensed immediately.
b. In addition, new goodwill arising from the combination was never recognized
in a pooling of interests. Similarly, no valuation adjustments were recorded for
any of the assets or liabilities combined.
2. The book values of the two companies were simply brought together to produce a
set of consolidated financial records. A pooling was viewed as affecting the
owners rather than the two companies.
3. The results of operations reported by both parties were combined on a retroactive
basis as if the companies had always been together.
4. Controversy historically surrounded the pooling of interests method.
a. Any cost figures indicated by the exchange transaction that created the
combination were ignored.
b. Income balances previously reported were altered since operations were
combined on a retroactive basis.
c. Reported net income was usually higher in subsequent years than in a
purchase since no goodwill or valuation adjustments were recognized which
require amortization.
Chapter 02 – Consolidation of Financial Information
2-4
Answers to Questions
1. A business combination is the process of forming a single economic entity by the uniting
of two or more organizations under common ownership. The term also refers to the entity
that results from this process.
2. (1) A statutory merger is created whenever two or more companies come together to
form a business combination and only one remains in existence as an identifiable entity.
This arrangement is often instituted by the acquisition of substantially all of an
enterprise’s assets. (2) A statutory merger can also be produced by the acquisition of a
company’s capital stock. This transaction is labeled a statutory merger if the acquired
company transfers its assets and liabilities to the buyer and then legally dissolves as a
corporation. (3) A statutory consolidation results when two or more companies transfer
all of their assets or capital stock to a newly formed corporation. The original companies
are being ―consolidated‖ into the new entity. (4) A business combination is also formed
whenever one company gains control over another through the acquisition of outstanding
voting stock. Both companies retain their separate legal identities although the common
ownership indicates that only a single economic entity exists.
3. Consolidated financial statements represent accounting information gathered from two or
more separate companies. This data, although accumulated individually by the
organizations, is brought together (or consolidated) to describe the single economic entity
created by the business combination.
4. Companies that form a business combination will often retain their separate legal
identities as well as their individual accounting systems. In such cases, internal financial
data continues to be accumulated by each organization. Separate financial reports may
be required for outside shareholders (a noncontrolling interest), the government, debt
holders, etc. This information may also be utilized in corporate evaluations and other
decision making. However, the business combination must periodically produce
consolidated financial statements encompassing all of the companies within the single
economic entity. The purpose of a worksheet is to organize and structure this process.
The worksheet allows for a simulated consolidation to be carried out on a regular,
periodic basis without affecting the financial records of the various component
companies.
5. Several situations can occur in which the fair value of the 50,000 shares being issued
might be difficult to ascertain. These examples include:
The shares may be newly issued (if Jones has just been created) so that no accurate
value has yet been established;
Jones may be a closely held corporation so that no fair value is available for its
shares;
The number of newly issued shares (especially if the amount is large in comparison to
the quantity of previously outstanding shares) may cause the price of the stock to
fluctuate widely so that no accurate fair value can be determined during a reasonable
period of time;
Jones’ stock may have historically experienced drastic swings in price. Thus, a
quoted figure at any specific point in time may not be an adequate or representative
value for long-term accounting purposes.
6. For combinations resulting in complete ownership, the acquisition method allocates the
fair value of the consideration transferred to the separately recognized assets acquired
and liabilities assumed based on their individual fair values.
Chapter 02 – Consolidation of Financial Information
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7. The revenues and expenses (both current and past) of the parent are included within
reported figures. However, the revenues and expenses of the subsidiary are
consolidated from the date of the acquisition forward within the worksheet consolidation
process. The operations of the subsidiary are only applicable to the business
combination if earned subsequent to its creation.
8. Morgan’s additional acquisition value may be attributed to many factors: expected
synergies between Morgan’s and Jennings’ assets, favorable earnings projections,
competitive bidding to acquire Jennings, etc. In general however, any amount paid by
the parent company in excess of the fair values of the subsidiary’s net assets acquired is
reported as goodwill.
9. In the vast majority of cases the assets acquired and liabilities assumed in a business
combination are recorded at their fair values. If the fair value of the consideration
transferred (including any contingent consideration) is less than the total net fair value
assigned to the assets acquired and liabilities assumed, then an ordinary gain on bargain
purchase is recognized for the difference.
10. Shares issued are recorded at fair value as if the stock had been sold and the money
obtained used to acquire the subsidiary. The Common Stock account is recorded at the
par value of these shares with any excess amount attributed to additional paid-in capital.
11. The direct combination costs of $98,000 are allocated to expense in the period in which
they occur. Stock issue costs of $56,000 are treated as a reduction of APIC.
Chapter 02 – Consolidation of Financial Information
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Answers to Problems
1. D
2. B
3. D
4. A
5. B
6. A
7. A
8. B
9. C
10. B Consideration transferred (fair value) $800,000
Cash $150,000
Accounts receivable 140,000
Software 320,000
Research and development asset 200,000
Liabilities (130,000)
Fair value of net identifiable assets acquired 680,000
Goodwill $120,000
11. C Legal and accounting fees accounts payable $15,000
Contingent liabilility 20,000
Donovan’s liabilities assumed 60,000
Liabilities assumed or incurred $95,000
12. D Consideration transferred (fair value) $420,000
Current assets $90,000
Building and equipment 250,000
Unpatented technology 25,000
Research and development asset 45,000
Liabilities (60,000)
Fair value of net identifiable assets acquired 350,000
Goodwill $ 70,000
Current assets $ 90,000
Building and equipment 250,000
Unpatented technology 25,000
Research and development asset 45,000
Goodwill 70,000
Total assets $480,000
Chapter 02 – Consolidation of Financial Information
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13. C Value of shares issued (51,000 × $3)……………………………….. $153,000
Par value of shares issued (51,000 × $1)………………………….. 51,000
Additional paid-in capital (new shares) …………………………… $102,000
Additional paid-in capital (existing shares) …………………….. 90,000
Consolidated additional paid-in capital (fair value)…………… $192,000
At the acquisition date, the parent makes no change to retained earnings.
14. B Consideration transferred (fair value) …………………….. $400,000
Book value of subsidiary (assets minus liabilities) …. (300,000)
Fair value in excess of book value ……………………… 100,000
Allocation of excess fair over book value
identified with specific accounts:
Inventory…………………………………………………………… 30,000
Patented technology………………………………………….. 20,000
Buildings and equipment …………………………………… 25,000
Long-term liabilities …………………………………………… 10,000
Goodwill……………………………………………………………. $15,000
15. D Hill patented technology………………………………………… $230,000
Loring patented technology (fair value)………………….. 200,000
Acquisition-date consolidated balance sheet value … $430,000
16. a. An intangible asset acquired in a business combination is recognized as an
asset apart from goodwill if it arises from contractual or other legal rights
(regardless of whether those rights are transferable or separable from the
acquired enterprise or from other rights and obligations). If an intangible
asset does not arise from contractual or other legal rights, it shall be
recognized as an asset apart from goodwill only if it is separable, that is, it
is capable of being separated or divided from the acquired enterprise and
sold, transferred, licensed, rented, or exchanged (regardless of whether
there is an intent to do so). An intangible asset that cannot be sold,
transferred, licensed, rented, or exchanged individually is considered
separable if it can be sold, transferred, licensed, rented, or exchanged with
a related contract, asset, or liability.
b. Trademarks—usually meet both the separability and legal/contractual
criteria.
Customer list—usually meets the separability criterion.
Copyrights on artistic materials—usually meet both the separability and
legal/contractual criteria.
Agreements to receive royalties on leased intellectual property—usually
meet the legal/contractual criterion.
Unpatented technology—may meet the separability criterion if capable
of being sold even if in conjunction with a related contract, asset, or
liability.
Chapter 02 – Consolidation of Financial Information
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17. (12 minutes) (Journal entries to record a merger—acquired company
dissolved)
Inventory 600,000
Land 990,000
Buildings 2,000,000
Customer Relationships 800,000
Goodwill 690,000
Accounts Payable 80,000
Common Stock 40,000
Additional Paid-In Capital 960,000
Cash 4,000,000
Professional Services Expense 42,000
Cash 42,000
Additional Paid-In Capital 25,000
Cash 25,000
18. (12 minutes) (Journal entries to record a bargain purchase—acquired company
dissolved)
Inventory 600,000
Land 990,000
Buildings 2,000,000
Customer Relationships 800,000
Accounts Payable 80,000
Cash 4,200,000
Gain on Bargain Purchase 110,000
Professional Services Expense 42,000
Cash 42,000
Chapter 02 – Consolidation of Financial Information
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19. (15 Minutes) (Consolidated balances)
In acquisitions, the fair values of the subsidiary’s assets and liabilities are
consolidated (there are a limited number of exceptions). Goodwill is reported
at $80,000, the amount that the $760,000 consideration transferred exceeds the
$680,000 fair value of Sol’s net assets acquired.
Inventory = $670,000 (Padre’s book value plus Sol’s fair value)
Land = $710,000 (Padre’s book value plus Sol’s fair value)
Buildings and equipment = $930,000 (Padre’s book value plus Sol’s fair
value)
Franchise agreements = $440,000 (Padre’s book value plus Sol’s fair
value)
Goodwill = $80,000 (calculated above)
Revenues = $960,000 (only parent company operational figures are
reported at date of acquisition)
Additional paid-in capital = $265,000 (Padre’s book value adjusted for
stock issue less stock issuance costs)
Expenses = $940,000 (only parent company operational figures plus
acquisition-related costs are reported at date of acquisition)
Retained earnings, 1/1 = $390,000 (Padre’s book value)
Chapter 02 – Consolidation of Financial Information
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20. (20 minutes) Journal entries for a merger using alternative values.
a. Acquisition date fair values:
Cash paid $700,000
Contingent performance liability 35,000
Consideration transferred $735,000
Fair values of net assets acquired 750,000
Gain on bargain purchase $ 15,000
Receivables 90,000
Inventory 75,000
Copyrights 480,000
Patented Technology 700,000
Research and Development Asset 200,000
Current liabilities 160,000
Long-Term Liabilities 635,000
Cash 700,000
Contingent Performance Liability 35,000
Gain on Bargain Purchase 15,000
Professional Services Expense 100,000
Cash 100,000
b. Acquisition date fair values:
Cash paid $800,000
Contingent performance liability 35,000
Consideration transfer $835,000
Fair values of net assets acquired 750,000
Goodwill $ 85,000
Receivables 90,000
Inventory 75,000
Copyrights 480,000
Patented Technology 700,000
Research and Development Asset 200,000
Goodwill 85,000
Current Liabilities 160,000
Long-Term Liabilities 635,000
Cash 800,000
Contingent Performance Liability 35,000
Professional Services Expense 100,000
Cash 100,000
Chapter 02 – Consolidation of Financial Information
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21. (20 Minutes) (Determine selected consolidated balances)
Under the acquisition method, the shares issued by Wisconsin are recorded at
fair value using the following journal entry:
Investment in Badger (value of debt and shares issued) 900,000
Common Stock (par value)…………………………………….. 150,000
Additional Paid-In Capital (excess over par value) ….. 450,000
Liabilities………………………………………………………………. 300,000
The payment to the broker is accounted for as an expense. The stock issue
cost is a reduction in additional paid-in capital.
Professional Services Expense…………………………………… 30,000
Additional Paid-In Capital …………………………………………… 40,000
Cash …………………………………………………………………… 70,000
Allocation of Acquisition-Date Excess Fair Value:
Consideration transferred (fair value) for Badger Stock $900,000
Book Value of Badger, 6/30 ………………………………………… 770,000
Fair Value in Excess of Book Value………………………… $130,000
Excess fair value (undervalued equipment)…………………. 100,000
Excess fair value (overvalued patented technology) ……. (20,000)
Goodwill……………………………………………………………….. $ 50,000
CONSOLIDATED BALANCES:
Net income (adjusted for professional services expense. The
figures earned by the subsidiary prior to the takeover
are not included) ……………………………………………………………. $ 210,000
Retained earnings, 1/1 (the figures earned by the subsidiary
prior to the takeover are not included)…………………………….. 800,000
Patented technology (the parent’s book value plus the fair
value of the subsidiary) ………………………………………………….. 1,180,000
Goodwill (computed above) ……………………………………………. 50,000
Liabilities (the parent’s book value plus the fair value
of the subsidiary’s debt plus the debt issued by the parent
in acquiring the subsidiary) ……………………………………………. 1,210,000
Common stock (the parent’s book value after recording
the newly-issued shares)………………………………………………… 510,000
Additional Paid-in Capital (the parent’s book value
after recording the two entries above) …………………………….. 680,000
Chapter 02 – Consolidation of Financial Information
2-12
22. (20 minutes) (Preparation of a consolidated balance sheet)*
PINNACLE COMPANY AND CONSOLIDATED SUBSIDIARY STRATA
Worksheet for a Consolidated Balance Sheet
January 1, 2013
Pinnacle Strata Adjust. & Elim. Consolidated
Cash 433,000 122,000 555,000
Accounts receivable 1,210,000 283,000 1,493,000
Inventory 1,235,000 350,000 1,585,000
Investment in Strata 3,200,000 0 (S) 2,600,000
(A) 600,000 0
Buildings (net) 5,572,000 1,845,000 (A) 300,000 7,717,000
Licensing agreements 0 3,000,000 (A) 100,000 2,900,000
Goodwill 350,000 0 (A) 400,000 750,000
Total assets 12,000,000 5,600,000 15,000,000
Accounts payable (300,000) (375,000) (675,000)
Long-term debt (2,700,000) (2,625,000) (5,325,000)
Common stock (3,000,000) (1,000,000) (S) 1,000,000 (3,000,000)
Additional paid-in cap. 0 (500,000) (S) 500,000 0
Retained earnings (6,000,000) (1,100,000) (S) 1,100,000 (6,000,000)
Total liab. & equities (12,000,000) (5,600,000) 3,300,000 3,300,000 (15,000,000)
*Although this solution uses a worksheet to compute the consolidated amounts, the
problem does not require it.
23. (50 Minutes) (Determine consolidated balances for a bargain purchase.)
a. Marshall’s acquisition of Tucker represents a bargain purchase because
the fair value of the net assets acquired exceeds the fair value of the
consideration transferred as follows:
Fair value of net assets acquired $515,000
Fair value of consideration transferred 400,000
Gain on bargain purchase $115,000
In a bargain purchase, the acquisition is recorded at the fair value of the
net assets acquired instead of the fair value of the consideration
transferred (an exception to the general rule).
Prior to preparing a consolidation worksheet, Marshall records the three
transactions that occurred to create the business combination.
Investment in Tucker……………………………………….. 515,000
Long-term Liabilities……………………………………………………… 200,000
Common Stock (par value)…………………………………………….. 20,000
Additional Paid-In Capital………………………………………………. 180,000
Gain on Bargain Purchase …………………………………………….. 115,000
(To record liabilities and stock issued for Tucker acquisition fair value)
Chapter 02 – Consolidation of Financial Information
2-13
23. (continued)
Professional Services Expense…………………….. 30,000
Cash …………………………………………………….. 30,000
(to record payment of professional fees)
Additional Paid-In Capital …………………………….. 12,000
Cash …………………………………………………….. 12,000
(To record payment of stock issuance costs)
Marshall’s trial balance is adjusted for these transactions (as shown in the
worksheet that follows).
Next, the fair of the $400,000 investment is allocated:
Consideration transferred at fair value…………………………….. $400,000
Book value (assets minus liabilities or
total stockholders’ equity)………………………………………….. 460,000
Book value in excess of consideration transferred …….. (60,000)
Allocation to specific accounts based on fair value:
Inventory…………………………………………………………. 5,000
Land ……………………………………………………………… 20,000
Buildings…………………………………………………………. 30,000 55,000
Gain on bargain purchase (excess net asset fair value
over consideration transferred)………………………………….. $(115,000)
CONSOLIDATED TOTALS
Cash = $38,000. Add the two book values less acquisition and stock issue
costs
Receivables = $360,000. Add the two book values.
Inventory = $505,000. Add the two book values plus the fair value
adjustment
Land = $400,000. Add the two book values plus the fair value adjustment.
Buildings = $670,000. Add the two book values plus the fair value
adjustment.
Equipment = $210,000. Add the two book values.
Total assets = $2,183,000. Summation of the above individual figures.
Accounts payable = $190,000. Add the two book values.
Long-term liabilities = $830,000. Add the two book values plus the debt
incurred by the parent in acquiring the subsidiary.
Common stock = $130,000.The parent’s book value after stock issue to
acquire the subsidiary.
Additional paid-in capital = $528,000.The parent’s book value after the stock
issue to acquire the subsidiary less the stock issue costs.
Retained earnings = $505,000. Parent company balance less $30,000 in
professional services expense plus $115,000 gain on bargain purchase.
Total liabilities and equity = $2,183,000. Summation of the above figures.
Chapter 02 – Consolidation of Financial Information
2-14
23. (continued)
b. MARSHALL COMPANY AND CONSOLIDATED SUBSIDIARY
Worksheet
January 1, 2013
Marshall Tucker Consolidation Entries Consolidated
Accounts Company* Company Debit Credit Totals
Cash…………………………………….. 18,000 20,000 38,000
Receivables …………………………. 270,000 90,000 360,000
Inventory …………………………….. 360,000 140,000 (A) 5,000 505,000
Land ……………………………………. 200,000 180,000 (A) 20,000 400,000
Buildings (net) …………………….. 420,000 220,000 (A) 30,000 670,000
Equipment (net) …………………… 160,000 50,000 210,000
Investment in Tucker ……………. 515,000 (S) 460,000
(A) 55,000 -0-
Total assets …………………………. 1,943,000 700,000 2,183,000
Accounts payable…………………. (150,000) (40,000) (190,000)
Long-term liabilities …………….. (630,000) (200,000) (830,000)
Common stock …………………….. (130,000) (120,000) (S) 120,000 (130,000)
Additional paid-in capital ……… (528,000) -0- (528,000)
Retained earnings, 1/1/13 ……… ( 505,000) (340,000) (S) 340,000 (505,000)
Total liab. and owners’ equity .. (1,943,000) (700,000) 515,000 515,000(2,183,000)
Marshall’s accounts have been adjusted for acquisition entries (see part a.).
Chapter 02 – Consolidation of Financial Information
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24. (Prepare a consolidated balance sheet)
Consideration transferred at fair value………….. $495,000
Book value ………………………………………………….. 265,000
Excess fair over book value …………………………. 230,000
Allocation of excess fair value to
specific assets and liabilities:
to computer software………………………………. $50,000
to equipment…………………………………………… (10,000)
to client contracts …………………………………… 100,000
to in-process research and development … 40,000
to notes payable……………………………………… (5,000) 175,000
Goodwill ……………………………………………………… $ 55,000
Pratt Spider Debit Credit Consolidated
Cash 36,000 18,000 54,000
Receivables 116,000 52,000 168,000
Inventory 140,000 90,000 230,000
Investment in Spider 495,000 -0- (S) 265,000
(A) 230,000 -0-
Computer software 210,000 20,000 (A) 50,000 280,000
Buildings (net) 595,000 130,000 725,000
Equipment (net) 308,000 40,000 (A) 10,000 338,000
Client contracts -0- -0- (A) 100,000 100,000
Research and
devlopment asset -0- -0- (A) 40,000 40,000
Goodwill -0- -0- (A) 55,000 55,000
Total assets 1,900,000 350,000 1,990,000
Accounts payable (88,000) (25,000) (113,000)
Notes payable (510,000) (60,000) (A) 5,000 (575,000)
Common stock (380,000) (100,000) (S)100,000 (380,000)
Additional paid-in
capital (170,000) (25,000) (S) 25,000 (170,000)
Retained earnings (752,000) (140,000) (S)140,000 (752,000)
Total liabilities
and equities (1,900,000) (350,000) 510,000 510,000 (1,990,000)
Chapter 02 – Consolidation of Financial Information
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24. (continued) Pratt Company and Subsidiary
Consolidated Balance Sheet
December 31, 2013
Assets Liabilities and Owners’ Equity
Cash $ 54,000 Accounts payable $ 113,000
Receivables 168,000 Notes payable 575,000
Inventory 230,000
Computer software 280,000
Buildings (net) 725,000
Equipment (net) 338,000
Client contracts 100,000
Research and Common stock 380,000
development asset 40,000 Additional paid in capital 170,000
Goodwill 55,000 Retained earnings 752,000
Total assets $1,990,000 Total liabilities and equities $1,990,000
25. (15 minutes) (Acquisition method entries for a merger)
Case 1: Fair value of consideration transferred $145,000
Fair value of net identifiable assets 120,000
Excess to goodwill $25,000
Case 1 journal entry on Allerton’s books:
Current Assets 60,000
Building 50,000
Land 20,000
Trademark 30,000
Goodwill 25,000
Liabilities 40,000
Cash 145,000
Case 2: Bargain Purchase under acquisition method
Fair value of consideration transferred $110,000
Fair value of net identifiable assets 120,000
Gain on bargain purchase $ 10,000
Case 2 journal entry on Allerton’s books:
Current Assets 60,000
Building 50,000
Land 20,000
Trademark 30,000
Gain on Bargain Purchase 10,000
Liabilities 40,000
Cash 110,000
Chapter 02 – Consolidation of Financial Information
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Problem 25. (continued)
In a bargain purchase, the acquisition method employs the fair value of the net
identifiable assets acquired as the basis for recording the acquisition. Because
this basis exceeds the amount paid, Allerton recognizes a gain on bargain
purchase. This is an exception to the general rule of using the fair value of the
consideration transferred as the basis for recording the combination.
26. (25 minutes) (Combination entries—acquired entity dissolved)
Cash consideration transferred $300,000
Contingent performance obligation 15,000
Consideration transferred (fair value) 315,000
Fair value of net identifiable assets 282,000
Goodwill $ 33,000
Journal entries:
Receivables 80,000
Inventory 70,000
Buildings 115,000
Equipment 25,000
Customer List 22,000
Research and Development Asset 30,000
Goodwill 33,000
Current Liabilities 10,000
Long-Term Liabilities 50,000
Contingent Performance Liability 15,000
Cash 300,000
Professional Services Expense 10,000
Cash 10,000
Chapter 02 – Consolidation of Financial Information
2-18
27. (30 Minutes) (Overview of the steps in applying the acquisition method when
shares have been issued to create a combination. Part h. includes a bargain
purchase.)
a. The fair value of the consideration includes
Fair value of stock issued $1,500,000
Contingent performance obligation 30,000
Fair value of consideration transferred $1,530,000
b. Stock issue costs reduce additional paid-in capital.
c. In a business combination, direct acquisition costs (such as fees paid to
investment banks for arranging the transaction) as expenses.
d. The par value of the 20,000 shares issued is recorded as an increase of
$20,000 in the Common Stock account. The $74 fair value in excess of par
value ($75 – $1) is an increase to additional paid-in capital of $1,480,000
($74 × 20,000 shares).
e. Fair value of consideration transferred (above) $1,530,000
Receivables $ 80,000
Patented technology 700,000
Customer relationships 500,000
In-process research and development 300,000
Liabilities (400,000) 1,180,000
Goodwill $ 350,000
f. Revenues and expenses of the subsidiary from the period prior to the
combination are omitted from the consolidated totals. Only the operational
figures for the subsidiary after the purchase are applicable to the business
combination. The previous owners earned any previous profits.
g. The subsidiary’s Common Stock and Additional Paid-in Capital accounts
have no impact on the consolidated totals.
h. The fair value of the consideration transferred is now $1,030,000. This
amount indicates a bargain purchase calculated as follows:
Fair value of consideration transferred $1,030,000
Receivables $ 80,000
Patented technology 700,000
Customer relationships 500,000
Research and development asset 300,000
Liabilities (400,000) 1,180,000
Gain on bargain purchase $ 150,000
The values of SafeData’s assets and liabilities would be recorded at fair value,
but there would be no goodwill recognized and a gain on bargain purchase
would be reported.
Chapter 02 – Consolidation of Financial Information
2-19
28. (50 Minutes) (Prepare balance sheet for a statutory merger using the
acquisition method. Also, use worksheet to derive consolidated totals.)
a. In accounting for the combination of NewTune and On-the-Go, the fair
value of the acquisition is allocated to each identifiable asset and liability
acquired with any remaining excess attributed to goodwill.
Fair value of consideration transferred (shares issued) $750,000
Fair value of net assets acquired:
Cash $ 29,000
Receivables 63,000
Trademarks 225,000
Record music catalog 180,000
In-process research and development 200,000
Equipment 105,000
Accounts payable (34,000)
Notes payable (45,000) 723,000
Goodwill $ 27,000
Journal entries by NewTune to record combination with On-the-Go:
Cash 29,000
Receivables 63,000
Trademarks 225,000
Record Music Catalog 180,000
Research and Development Asset 200,000
Equipment 105,000
Goodwill 27,000
Accounts Payable 34,000
Notes Payable 45,000
Common Stock (NewTune par value) 60,000
Additional Paid-In Capital 690,000
(To record merger with On-the-Go at fair value)
Additional Paid-In Capital 25,000
Cash 25,000
(Stock issue costs incurred
