1-1

Baker / Lembke / King

Corporate
Expansion and
Accounting for
Business
Combination
1
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 1-2
Control
AA business
business combination
combination occurs
occurs
Control
Control relates
relates to
to the
the ability
ability to
to
when
when two
two or
or more
more companies
companies join
join
direct
direct policies
policies and
and management.
management.
under
under common control.
common control.

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 1-3
Types of Business Combination
(a) Statutory Merger

AA Company

AA Company

BB Company

Only
Only one
oneofof the
thecombining
combining companies
companies survives
survives
and
and the
the other
other loses
loses its
its separate
separateidentify.
identify.
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 1-4
Types of Business Combination
(b) Statutory Consolidation

AA Company

CC Company

BB Company

Both
Boththethecombining
combiningcompanies
companiesare aredissolved
dissolvedand
and
the
theassets
assetsand
andliabilities
liabilitiesof
ofboth
bothcompanies
companiesareare
transferred
transferredto
toaanewly
newlycreated
createdcorporation.
corporation.
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 1-5
Types of Business Combination
(c) Stock Acquisition

AA Company AA Company

BB Company BB Company

One
One company
company acquires
acquiresthethevoting
voting shares
shares
of
of another
another company
company and and the
the two
two
companies
companies continue
continue to
to operate
operate separately.
separately.
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 1-6
Determining the Type of Business Combination
AA Company Invests in BB Company

Acquires Net Acquires

Assets Stock

Acquired
Yes
Company
Liquidated?
No

Record as Record as
Statutory Merger Stock Acquisition
or Statutory and Operate as
Consolidation Subsidiary.
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 1-7
Traditional Business Combination Alternatives
AA Company Invests in BB Company

Acquired Net Acquired

Assets Stock

Yes Qualify No Yes Qualify No

as Pooling? as Pooling?

Net Assets Net Assets Investment Investment

Recorded at Recorded at Recorded at Recorded at
Book Value Fair Value Book Value Fair Value

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 1-8
Point Corporation Illustration

On January 1, 20X1, Point Corporation purchases all

the assets and liabilities of Sharp Company in a
statutory merger by issuing to Sharp 10,000 shares
of $10 par value common stock. The shares issued
have a total market value of $600,000. Point incurs
legal and appraisal fees of $40,000 (for a total
purchase price of $640,000) in connection with the
combination and stock issue costs of $25,000.

Fair value of stock issued $600,000

Stock issue costs -25,000
Recorded amount of stock $575,000
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 1-9
Point Corporation Illustration
Assets, Liabilities, and Equities Book Value Fair Value

Cash and Receivables $ 45,000 $ 45,000

Inventory 65,000 75,000
Land 40,000 70,000
Buildings and Equipment 400,000 350,000
Accumulated Depreciation (150,000 )
Patent 80,000
Total Assets $400,000 $620,000
Current Liabilities $100,000 $110,000
Common Stock ($5 par) 100,000
Additional Paid-In Capital 50,000
Retained Earnings 150,000
Total Liabilities and Equities $400,000
Fair value of Net Assets $510,000
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 1-10
Point Corporation Illustration
Cost of Investment
$640,000 Excess of cost over
fair value of net
identifiable assets
Fair value of net $130,000
identifiable assets
Total differential
$340,000 $510,000
Excess of fair value
over book value of
net identifiable
assets
Book value of net
$210,000
identifiable assets

$300,000 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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 1-11
Point Corporation Illustration
The
The $40,000
$40,000 ofof other
otheracquisition
acquisition costs
costs associated
associated
with
with the
the combination
combination and
and the
the $25,000
$25,000 of of stock
stock
issue
issue costs
costs may
may be
be recorded
recorded in
in separate
separatetemporary
temporary
“suspense”
“suspense” accounts
accounts as
as incurred:
incurred:
Deferred Merger Costs 40,000
Cash 40,000
Record costs related to purchase of
Sharp Company.
Deferred Stock Issue Costs 25,000
Cash 25,000
Record costs related to issuance of
common stock.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 1-12
Point Corporation Illustration

Cash and Receivables fair value 45,000

Inventory fair value 75,000
Land fair value 70,000
Buildings and Equipment fair value 350,000
Patent fair value 80,000
Goodwill 130,000
Current Liabilities fair value 110,000
Common Stock book value 100,000
Additional Paid-In Capital fair value 475,000
Deferred Merger Costs 40,000
Deferred Stock Issue Costs 25,000
Record purchase of Sharp Company.

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 1-13
Entries Recorded by Acquired Company
The
The fair
fair value
value of
of Point
Point Corporation
Corporation shares
shares isis
recognized
recognized by by Sharp
Sharp atat the
the time
time of
of the
the
exchange,
exchange, andand aa gain
gain of
of $300,000
$300,000 isis recorded.
recorded.
Investment in Point Stock 600,000
Current Liabilities 100,000
Accumulated Depreciation 150,000
Cash and Receivables 45,000
Inventory 65,000
Land 40,000
Building and Equipment 400,000
Gain on Sale of Net Assets 300,000
Record transfer of assets to Point
Corporation.

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 1-14
Entries Recorded by Acquired Company
The
The distribution
distribution of ofPoint
Point
Corporation
Corporation stock
stock isis recorded.
recorded.

Common Stock 100,000

Additional Paid-In Capital 50,000
Retained Earnings 150,000
Gain on Sale of Net Assets 300,000
Investment in Point Stock 600,000
Record distribution of Point
Corporation stock.

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 1-15
Recording Goodwill

Because
Because expenditures
expenditures forfor “self-developed”
“self-developed”
goodwill
goodwill often
often are
are not
not distinguishable
distinguishable from
from
current
current operating
operating costs,
costs, such
such expenditures
expenditures are
are
required
required to
to be
beexpensed
expensed asas incurred.
incurred.

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 1-16
Recording Goodwill

When
Whengoodwill
goodwillisispurchased
purchasedin
inconnection
connectionwith
with
aabusiness
businesscombination,
combination,the
theamount
amountisisviewed
viewed
as
asobjectively
objectivelydeterminable
determinableandandisiscapitalized.
capitalized.

In
Inaapurchase-type
purchase-typebusiness
businesscombination,
combination,thethe
cost
costof
ofgoodwill
goodwillpurchased
purchasedisismeasured
measuredas asthe
the
excess
excessof
ofthe
thetotal
totalpurchase
purchaseprice
priceover
overthe
thefair
fair
value
valueof
ofthe
thenet
netidentifiable
identifiableassets
assetsacquired.
acquired.

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 1-17
Negative Goodwill
Fair value of net
identifiable assets
Excess of fair value
$510,000 of net identifiable
assets over cost
$50,000
Cost of investment
$460,000 Excess of fair value
over book value of
net identifiable
Total differential assets
$160,000 $210,000
Book value of net
identifiable assets

$300,000 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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 1-18
Combination Effected through Purchase of Stock

Point
Point Corporation
Corporation exchanges
exchanges 10,000
10,000 shares
sharesof
of its
its
stock
stock with
with aa total
total market
market value
value of
of $600,000
$600,000 for
for all
all
the
the shares
shares of
of Sharp
Sharp Company
Company in in aa purchase
purchase
transaction
transaction and
and incurs
incurs and
and records
records merger
merger costs
costs ofof
$40,000
$40,000 andand stock
stock issue
issue costs
costs of
of $25,000.
$25,000.
Investment in Sharp Stock 640,000
Common Stock 100,000
Additional Paid-In Capital 475,000
Deferred Merger Costs 40,000
Deferred Stock Issue Costs 25,000
Record purchase of Sharp Company
Stock.

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 1-19
Disclosure Requirements
1. The
1. The name
name and
and aa brief
brief description
description of
of the
the acquired
acquired
company.
company.
2.
2. A A statement
statement that
that purchase
purchase treatment
treatment has
has been
been
used.
used.
3.
3. Information
Information on on the
the total
total cost
cost incurred
incurred in
in making
making
the
the purchase.
purchase.
4.
4. The
The portion
portion ofof the
the year
year for
for which
which operating
operating
results
results of
of the
the acquired
acquired company
company havehave been
been
included.
included.
5.
5. Information
Information on on any
any contingent
contingent payments
payments oror
commitments
commitments and and their
their accounting
accounting treatment.
treatment.

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 1-20
Pro Forma Financial Statements

As
Asaaminimum,
minimum,
supplemental  Operating
supplemental  Operating results
results as
as ifif the
the
information
informationshould
shouldbe
be acquisition
provided acquisition hadhad been
been mademade at at
providedto
toshow…
show… the
the start
start of
of the
the period.
period.
 When
 When comparative
comparative financial
financial
statements
statements are are presented,
presented,
operating
operating results
results for
for thethe
preceding
preceding period
period asas ifif the
the
acquisition
acquisition hadhad occurred
occurred at at
the
the start
start of
of that
that period.
period.

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 1-21
Pooling of Interest
The
The FASB
FASB has
has decided
decided to to
eliminate
eliminate pooling
pooling of
of interest
interest as
as
an
an acceptable
acceptable method
method for for
accounting
accounting for
for business
business
combinations.
combinations.

However,
However, an an examination
examination of of this
this
method
method isis warranted
warranted because
because thethe
effects
effects of
of past
past poolings
poolings will
will
affect
affect financial
financial statements
statements for for
many
many years
years in
in the
the future.
future.

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 1-22
Pooling of Interest (Point’s Books)
On
OnJanuary
January1, 1,20X1,
20X1,in inaastatutory
statutorymerger
mergeraccounted
accountedfor
for
as
asaapooling
poolingof ofinterests,
interests,Point
PointCorporation
Corporationissued
issued10,000
10,000
shares
sharesofofits
its$10
$10par
parcommon
commonstockstockin
inexchange
exchangefor
forall
all
the
theassets
assetsandandliabilities
liabilitiesof
ofSharp
SharpCompany.
Company.
Cash and Receivables 45,000
Inventory Recorded at 65,000
Land book value 40,000
Buildings and Equipment 400,000
Accumulated Depreciation 150,000
Current Liabilities 100,000
Common Stock (Point Corporation) 100,000
Additional Paid-In Capital 50,000
Retained Earnings 150,000
Record pooling-type merger with Sharp.
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 1-23
Pooling of Interest (Sharp’s Books)
On
OnJanuary
January1, 1,20X1,
20X1,in inaastatutory
statutorymerger
mergeraccounted
accountedfor
for
as
asaapooling
poolingof ofinterests,
interests,Point
PointCorporation
Corporationissued
issued10,000
10,000
shares
sharesofofits
its$10
$10par
parcommon
commonstockstockin
inexchange
exchangefor
forall
all
the
theassets
assetsandandliabilities
liabilitiesof
ofSharp
SharpCompany.
Company.
Investment in Point Stock 300,000
Current Liabilities 100,000
Accumulated Depreciation 150,000
Cash and Receivables 45,000
Inventory 65,000
Land 40,000
Buildings and Equipment 400,000
Record transfer of assets to Point Corporation.

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 1-24
Pooling of Interest (Sharp’s Books)

The
The distribution
distribution ofof Point
Point Corporation
Corporation
shares
shares and
and the
the liquidation
liquidation of
of Sharp
Sharp are
are
recorded
recorded onon Sharp’s
Sharp’s books.
books.
Common Stock 100,000
Additional Paid-In Capital 50,000
Retained Earnings 150,000
Investment in Point Stock 300,000
Record distribution of Point Corporation stock.

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 1-25
Differences in Total Par Value
Combined Stockholders’ Equity
Capital stock
$400,000

Additional
paid-in capital
$80,000
The like stockholders’ equity accounts of
the combining companies
Retained are summed
earnings
without adjustment when the total par
$370,000
values of the shares exchanged are equal.

Case
Case11
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 1-26
Differences in Total Par Value

Net Assets of Sharp Company 300,000

Common Stock 100,000
Additional Paid-In Capital 50,000
Retained Earnings 150,000

Case
Case11
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 1-27
Differences in Total Par Value
Combined Stockholders’ Equity
Capital stock
$380,000

Additional
paid-in capital
When the total par$100,000
value of the shares issued
is less than Retained
the par value of the shares
earnings
replaced, the difference is reflected as an
$370,000
increase in additional paid-in capital.

Case
Case22
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 1-28
Differences in Total Par Value

Net Assets of Sharp Company 300,000

Common Stock 80,000
Additional Paid-In Capital 70,000
Retained Earnings 150,000

Case
Case22
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 1-29
Differences in Total Par Value
Combined Stockholders’ Equity
Capital stock
$440,000

Additional
paid-in capital
When the total par $40,000
value of the shares issued
is greater than the parearnings
Retained value of the shares
acquired, the difference is reflected as a
$370,000
reduction in additional paid-in capital.

Case
Case33
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 1-30
Differences in Total Par Value

Net Assets of Sharp Company 300,000

Common Stock 140,000
Additional Paid-In Capital 10,000
Retained Earnings 150,000

Case
Case33
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 1-31
Differences in Total Par Value
Combined Stockholders’ Equity

Capital stock
$510,000

Retained earnings
$340,000

Case
Case44
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 1-32
Differences in Total Par Value
Combined Stockholders’ Equity

Par valueWhen
of Point’s
Pointshares
issuesissued
21,000 shares,$210,000
the
Par value
$210,000
of Sharp’sparshares
value replaced
Capital of the shares issued
stock (100,000 )
Increase
exceeds
in totalthe
par$100,000
value par value of Sharp’s
$510,000 $110,000
Additional
shares
paid-in
retiredcapital
by enough
of Sharp
to eliminate (50,000
the )
Additional
combined
paid-in
additional
capital of
paid-in part )
Point capital and(30,000
Reduction of
in the
combined
combined retained
Retained retained
earnings
earnings earnings.
$ 30,000
$340,000

Case
Case44
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 1-33
Differences in Total Par Value

Net Assets of Sharp Company 300,000

Additional Paid-In Capital 30,000
Common Stock 210,000
Retained Earnings 120,000

Case
Case44
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 1-34
Disclosure Requirements--Pooling
1. The name and a brief description of the acquired
company.
2. A statement that pooling treatment has been used.
3. Description and number of shares issued in the
exchange.
4. For the separate companies, revenue, extraordinary
items, net income, changes in stockholders’ equity,
and the amount and handling of intercompany
transactions for the portion of the current period
before the date of the combination.
More
More

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 1-35
Disclosure Requirements--Pooling
5. A description of any adjustments of net assets or
income related to changes in accounting procedures.
6. A description of the impact of a change in the fiscal
period of a combining company.
7. A reconciliation of revenue and income previously
reported by the stock-issuing company with the
restated amounts reported for those periods for the
combined company.

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 1-36
Chapter One

The
End
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