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Business Combinations
ACCT 501
4.
Business Combinations
Friendly takeovers
Hostile takeovers
Goodwill
= AAP combinees assets step-up.
Assets
step up
= the fair market value of net assets
of the combinee the book value of
these net assets.
Book Value:
the book value of the accounting
consolidated net assets under pooling
accounting will typically be less than
those reported under purchase
accounting (i.e., B pooling < Bpurchase ).
Purchase Accounting
Purchased Goodwill
=purchase price (total cost of the
combinee)
the current fair values of identifiable
net assets of the combinee.
Negative Goodwill:
The excess amount is applied to reduce
proportionally the amounts initially
assigned to noncurrent assets (other than
long-term investments.)
If this procedure does not extinguish the
excess, a Negative Goodwill account
would be credited for the remaining
excess.
51,250
750
23,000
$200,000
$1,000,000
3,000,000
600,000
4,600,000
(Continued)
700,000
1,400,000
Example I (contd.):
$ 1,150,000
3,400,000
600,000
(500,000)
(950,000)
$3,700,000
Investment in Mason
Company Common
Stock (150,000 x $25)
3,750,000
Common stock
(150,000 x $10)
1,500,000
Paid-in Capital in
Excess of Par
2,250,000
(Continued)
12/31/1999 (contd.)
Investment in Mason
Company Common Stock
($5,000+$10,000+$51,250)
66,250
133,750
Cash
To record payment of out-of-pocket
costs incurred in merger with
Mason Company.
200,000
(Continued)
12/31/1999 (contd.)
Current Assets
Plant Assets
Other Assets
Discount on Long-Term Debt
Goodwill
Current Liabilities
Long-Term Debt
Investment in Mason
Company Common
Stock ($3,750,000+$66,250)
11,500,000
3,400,000
600,000
50,000
116,250
500,000
1,000,000
3,816,250
Current Liabilities
Long-Term Debt
Common Stock , $10 stated
value
Paid-in Capital in Excess of
Stated Value
Retained Earnings
Current Assets
Plant Assets (net)
500,000
1,000,000
1,000,000
700,000
1,400,000
1,000,000
3,000,000
Assets
Current assets
Investment in marketable debt
securities (held to maturity)
Plant assets (net)
Intangible assets (net)
Total assets
Carrying
Current Fair
Amounts
Values
$ 190,000 $ 200,000
50,000
870,000
90,000
$1,200,000
60,000
900,000
100,000
$1,260,000
(Continued)
Liabilities and
Stockholders Equity
Current liabilities
Long-term debt
Total Liabilities
Common stock, $1 par
Deficit
Total stockholders equity
Carrying
Amounts
$ 240,000
500,000
$ 740,000
$ 600,000
(140,000)
$ 460,000
Current Fair
Values
$ 240,000
520,000
$ 760,000
=$54,000
To intangible assets:
$60,000 x
$900,000
($900,000 +$100,000)
=$6,000
Example II (contd.)
400,000
Cash
400,000
40,000
40,000
(Continued)
12/31/1999 (contd.)
Current Assets
Investments in Marketable Debt
Securities
Plant Assets ($900,000 - $54,000)
Intangible Assets ($100,000 - $6,000)
Current Liabilities
Long-Term Debt
Premium on Long-Term Debt
($520,000 - $500,000)
200,000
60,000
846,000
94,000
240,000
500,000
20,000
Pooling-of-Interests Accounting
Pooling-of-Interests Accounting
(contd.)
Pooling-of-Interests Accounting
(contd.)
Retained Earnings
1,400,000
Expenses of Business
Combination
Cash
To record payment of out-ofpocket costs incurred in
merger with Mason Company
200,000
200,000
Pooling Accounting
Current Assets
1,150,000
1,000,000
Plant Assets
3,400,000
3,000,000
Other Assets
600,000
600,000
Discount on
Long-Term Debt
Good will
Expense of Business
Combination
50,000
116,250
200,000
(Continued)
Pooling Accounting
500,000
500,000
Long-Term Debt
1,000,000
1,000,000
Common Stock,
$ 10 par
1,500,000
1,500,000
Paid-in Capital in
Excess of Par
2,116,250
200,000
Retained Earnings
Cash
To record merger with
Mason Company.
1,400,000
200,000
200,000
accounting
net assets $3,616,250
Pooling accounting
net assets 2,900,000
Difference $ 716,250
$150,000
400,000
116,250
50,000
$716,250
Assuming:
Mason
Company
$500,000*
$375,000
$0.50
$3.75
1,000,000+
100,000+
Market
price per
shareof business combination.
$25
* Net of $200,000
expenses
+ Outstanding during
entire year.
Price-earnings
ratio
50
$30
8
Contd.:
e.Issuance of Unusual Securities
f. Creation of instant Earnings
g.Contingent Payouts
h.Burying the Costs of Pooling-Type
Business Combinations
(contd.)
100,000
500
99,500
7500
(Continued)
1000
4,000
12,500
87,000
89,550
Purchasecombinee
Fair value
Not reported
Poolingcombinor
Carrying amount
Reported
Poolingcombinee
Carrying amount
Reported
Pooling Accounting
The income statement of the combined
entity for the period in which the
business combination occurred
includes the results of operations of the
constituent companies as though the
combination had been completed at the
beginning of the period regardless
when the combination consummated.
Example IV:
Example IV (contd.)
Mason
Company
$10,000,000
$5,000,000
$ 7,000,000
$3,000,000
Operating expenses
1,883,333*
1,274,500
Interest expense
150,000
100,500
466,667
250,000
Total
costs and
*Includes $200,000
expenses
of business combination.
expenses
$ 9,500,000
$4,625,000
Example IV (contd.)
Example IV (contd.)
SAXON CORPORATION
Mason
Company
Eliminations
Combined
10,000,000 5,000,000
7,000,000 3,000,000
10,000,000
Operating expenses
1,883,333 1,274,500
3,157,833
Interest expense
150,000
100,500
Income taxes
expense
466,667
250,000
716,667
9,500,000 4,625,000
(25,000) 14,100,000
(a) (25,000)
225,500
Purchase
Accounting
Pooling-ofInterests
Accounting
Underlying
premise
Acquisition of
assets
Combining of
stockholder
interests
Applicability
Combinations
not meeting all
12 criteria for
pooling
accounting
Combinations
meeting all 12
criteria for
pooling
accounting
(Continued)
Purchase
Accounting
Pooling-of-Interests
Accounting
Accounting
recognition of
investment in
combinee
At cost, including
amount of
consideration, direct
out-of-pocket costs,
and determinable
contingent
consideration
At carrying amount of
combinees net
assets (all out-ofpocket costs are
recognized as
expenses of the
issuer)
Valuation of
combinees net
assets in combined
enterprise
Purchase
Accounting
Pooling-of-Interests
Accounting
YES
(Continued)
Purchase
Accounting
Pooling-of-Interests
Accounting
Financial
statements and
notes for period of
business
combination:
Balance sheet
Purchase Accounting
Income
statement
Combinors operations
for entire period;
combinees operations
from date of
combination to end of
period
Disclosure of
operations in
notes
Pooling-of-Interests
Accounting
Both issuers and
combinees operations
for entire period as
though combination
took place at beginning
of period; prior periods
restated comparably
Separately for
constituent companies
for period prior to
combination
Purchase-Type Statutory
Consolidation
Example V :
Example V (contd.):
Assets
Current assets
Plant assets (net)
Other assets (net)
Total assets
Lamson
Corporation
Donald
Company
600,000 $ 400,000
1,800,000
1,200,000
400,000
300,000
$ 2,800,000 $1,9,00,000
(Continued)
Example V (contd.):
Liabilities &
Stockholders Equity
Current liabilities
Long-term debt
Common stock,$10 par
Additional paid-in
capital
Retained earnings
Total liabilities &
Lamson
Donald
Corporation Company
$ 400,000 $ 300,000
500,000
200,000
430,000
620,000
300,000
400,000
1,170,000
380,000
Example V (contd.):
Example V (contd.):
Example V(contd.):
Lamson
Corporation
Donald
Company
$2,400,000
$1,800,000
180,000
60,000
$2,580,000 $1,860,000
Example V (contd.):
Example V (contd.):
Example V (contd.):
Investment in Lamson
Corporation and Donald
Company Common Stock
(74,000 x $60)
Common Stock, no par
4,440,000
4,440,000
Example V (contd.):
12/31/1999 (contd.)
Investment in Lamson
Corporation and Donald
Company Common Stock
Common Stock, no par
Cash
To record payment of costs incurred in
consolidation of Lamson Corporation and
Donald Company. Accounting, legal, and
finders fees in connection with the
consolidation are recorded as investment
cost; other out-of-pocket costs are recorded
as a reduction in the proceeds received
from the issuance of common stock.
110,000
90,000
200,000
(Continued)
Example V (contd.):
12/31/1999 (contd.)
Current Assets ($600,000+$500,000) 1,100,000
Plant Assets ($1,800,000+$1,400,000) 3,200,000
800,000
Other Assets ($400,000+$400,000)
Goodwil
l
Current Liabilities
Long-Term Debt
Investment in Lamson
Corporation and Donald
Company Common
Stock
850,000
700,000
700,000
4,550,000
(Continued)
Example V (contd.):
12/31/1999 (contd.)
Amount of goodwill is
computed as follows:
Total cost of investment
($4,400,000+$110,00)
4,550,000
(1,900,000)
$ 850,000
50,000*
50,000
=$30,000
= 20,000
$50,000