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Baker / Lembke / King

Advanced
Financial
Accounting
Fourth Edition

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Pepperdine
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The McGraw-Hill Companies,

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The McGraw-Hill Companies,

Baker / Lembke / King

Corporate Expansion
and Accounting for
Business
Combinations

The McGraw-Hill Companies,

AAbusiness
businesscombination
combinationoccurs
occurs
when
whentwo
twoor
ormore
morecompanies
companies
join
joinunder
undercommon
commoncontrol.
control.

Types of Business Combinations

AA Company
AA Company
BB Company

Statutory Merger

Types of Business Combinations

AA Company
CC Company
BB Company

Statutory Consolidation

Types of Business Combinations

AA Company

AA Company

BB Company

BB Company

Stock Acquisition

Determining the Type of Business Combinations


AA Company Invests in BB Company
Acquires Net
Assets

Acquires
Stock

Yes

Acquired
Company
Liquidated?
No

Record as
Statutory Merger
or Statutory
Consolidation

Record as
Statutory Merger
or Statutory
Consolidation

10

Business Combination Alternatives


AA Company Invests in BB Company
Acquires Net
Assets

Yes

Qualify
as Pooling?

Net Assets
Recorded at
Book Value

Acquires
Stock

No

Net Assets
Recorded at
Fair Value

Yes

Qualify
as Pooling?

Investment
Recorded at
Book Value

No

Investment
Recorded at
Fair Value

Relationship Between FMV and Price Paid


Cost of Investment
$640,000
Fair value of net
identifiable assets
Total differential
$340,000

$510,000

Book value of net


identifiable assets
$300,000

11

Excess of cost over


fair value of net
identifiable assets
$130,000

Excess of fair value


over book value of
net identifiable
assets
$210,000

12

Purchase Combination (Points Books)


Cash and Receivables
45,000
book value
Inventory
75,000
market value
market value
Land
70,000
market value
Building and Equipment
350,000
Patent
80,000
market value
Goodwill
130,000
Current Liabilities
book value
Common Stock
book value
market value
Additional Paid-In Capital
Deferred Merger Costs
Deferred Stock Issue Costs

110,000
100,000
475,000
40,000
25,000

Negative Goodwill

13

Fair value of net


identifiable assets
$510,000

Total differential
$160,000

Excess of fair value


of net identifiable
assets over cost
$50,000

Cost of investment
$460,000

Book value of net


identifiable assets
$300,000

Excess of fair value


over book value of
net identifiable
assets
$210,000

14

Pooling of Interest

An
Anexchange
exchangeof
of
common
commonstock.
stock.

What
Whatisisessential
essential
for
foraacombination
combinationto
to
be
beviewed
viewedas
asaa
pooling
poolingof
ofinterest?
interest?

Disclosure Requirements

The
The name
name and
and aa brief
brief description
description of
of the
the acquired
acquired
company.
company.

A
Astatement
statement that
that purchase
purchase treatment
treatment has
has been
been used.
used.

Information
Information on
on the
the total
total cost
cost incurred
incurred in
in making
making the
the
purchase.
purchase.

The
The portion
portion of
of the
the year
year for
for which
which operating
operating results
results
of
of the
the acquired
acquired company
company have
have been
been included.
included.

A
Adescription
description of
ofthe
the plan
plan for
for amortization
amortization of
of
goodwill
goodwill and
and the
the amortization
amortization method.
method.

Information
Information on
on any
any contingent
contingent payments
payments or
or
commitments
commitments and
and their
their accounting
accounting treatments.
treatments.

15

Pro Forma Financial Statements


As
Asaaminimum,
minimum,
supplemental
supplemental
information
informationshould
shouldbe
be
provided
providedto
toshow
show

Operating
Operating results
results as
as ifif the
the

acquisition
acquisition had
had been
been made
made at
at
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 the
the
preceding
preceding period
period as
as ifif the
the
acquisition
acquisition had
had occurred
occurred at
at
the
the start
start of
of the
the period.
period.

16

17

Pooling of Interest (Points Books)


On
OnJanuary
January1,1,19X1,
19X1,in
inaastatutory
statutorymerger,
merger,Point
PointCorporation
Corporation
issued
issued10,000
10,000shares
sharesof
ofits
its$10
$10par
parcommon
commonstock
stockin
inexchange
exchange
for
forall
allthe
theassets
assetsand
andliabilities
liabilitiesof
ofSharp
SharpCompany.
Company.
Cash and Receivables
Inventory
Recorded at
Land
book value
Buildings and Equipment
Accumulated Depreciation
Current Liabilities
Common Stock (Point Corporation)
Additional Paid-In Capital
Retained Earnings

45,000
65,000
40,000
400,000
150,000
100,000
100,000
50,000
150,000

18

Pooling of Interest (Sharps Books)


On
OnJanuary
January1,1,19X1,
19X1,in
inaastatutory
statutorymerger,
merger,Point
PointCorporation
Corporation
issued
issued10,000
10,000shares
sharesof
ofits
its$10
$10par
parcommon
commonstock
stockin
inexchange
exchange
for
forall
allthe
theassets
assetsand
andliabilities
liabilitiesof
ofSharp
SharpCompany.
Company.
Investment in Point Stock
Current Liabilities
Accumulated Depreciation
Cash and Receivables
Inventory
Land
Buildings and Equipment

300,000
100,000
150,000
45,000
65,000
40,000
400,000

19

Pooling of Interest (Sharps Books)


The
Thedistribution
distributionof
ofPoint
PointCorporation
Corporationshares
sharesand
andthe
the
liquidation
liquidationof
ofSharp
Sharpare
arerecorded
recordedon
onSharps
Sharpsbooks.
books.
Common Stock
Additional Paid-In Capital
Retained Earnings
Investment in Point Stock

100,000
50,000
150,000
300,000

20

Chapter One

The
The
End
End