ADMS 4520 Lecture Notes - Lecture 3: Current Liability, Retained Earnings, Homestar Runner
11 May 2018
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Chapter 3 – Business Combinations
CHAPTER 3
Business Combinations
SOLUTIONS TO PROBLEMS
P3-1
a. Statement of financial position:
Alternatives:
1 2 3 4
Current assets
$6,650,000
$5,700,000
$8,550,000
$8,550,000
Capital assets
13,450,000
13,450,000
13,450,000
13,450,000
Investments
350,000
350,000
350,000
350,000
Goodwill
500,000
500,000
500,000
500,000
Total Assets
$20,950,000
$20,000,000
$22,850,000
$22,850,000
Current liabilities
$4,150,000
$4,000,000
$4,150,000
$4,150,000
Long-term liabilities
6,800,000
6,000,000
6,800,000
6,800,000
Deferred income taxes
2,000,000
2,000,000
2,000,000
2,000,000
Common shares
1,500,000
1,500,000
3,400,000
3,400,000
Retained earnings
6,500,000
6,500,000
6,500,000
6,500,000
Total Equities
$20,950,000
$20,000,000
$22,850,000
$22,850,000
Only in the fourth alternative is Prairie’s statement of financial position really a
consolidated statement. In the first three alternatives, Prairie is buying the assets (or net
assets) of Savannah, and those assets will be recorded directly on Prairie’s books.
b. Share ownership and intercompany relationship:
Alternative
Company
Shares owned by
Intercompany
relationship
1
Prairie
Prairie’s prior shareholders
none
Savannah
2
Prairie
Prairie’s prior shareholders
none
Savannah
3
Prairie
80% by Prairie’s prior shareholders;
20% by Savannah Inc.
Prairie partially owned
by Savannah Inc.
Savannah
Savannah’s prior shareholders
4
Prairie
80% by Prairie’s prior shareholders;
Savannah wholly
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Chapter 3 – Business Combinations
20% by Savannah Inc.
owned by Prairie Ltd.
Savannah
Prairie Ltd.
P3-2
Measure Step:
Case
A
B
C
D
E
F
Purchase price (a)
$120
$120
$100
$80
$100
$80
Carrying value of net identifiable assets (b)
80
100
80
100
120
120
Fair value of net identifiable assets (c)
100
80
120
120
80
100
Net fair value adjustment (a – b)
40
20
20
(20)
(20)
(40)
Fair value adjustment allocated to net identifiable assets
(c–b)
(20)
20
(40)
(20)
40
20
Balance = goodwill/(gain on bargin purchase) (a – c)
20
40
(20)
(40)
20
(20)
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Chapter 3 – Business Combinations
P3-3
Measure Step:
100% Purchase of West Company Ltd., December 31, 20X6
Purchase price*
$600,000
Fair value of preferred shares*
250,000
Less carrying value of West’s net identifiable assets (100%)
(660,000)
= Fair Value Adjustment, allocated below
190,000
Carrying value
Fair
Fair value
FVA Allocated
(a)
Value
Adjustment
(b)
(c)=(b)–(a)
Current assets
$200,000
$250,000
$50,000
Capital assets, net
750,000
850,000
100,000
Current liabilities
(140,000)
(175,000)
(35,000)
Long-term liabilities
(150,000)
(220,000)
(70,000)
Preferred shares
(250,000)
(250,000)
0
45,000
Total fair value adjustment allocated to net identifiable
assets and preferred shares
(45,000)
Net asset carrying value
$660,000
Fair value of net identifiable assets acquired
$705,000
Balance of FVA allocated to goodwill
$145,000
The total fair value of West Company, including the value of the preferred shares is
$850,000. Under IFRS, the full fair value of the acquiree can also be calculated as the
purchase price paid by the acquirer for its shares plus the fair value of the non-controlling
interest. Under IFRS the fair value of preferred shares is treated as a non-controlling
interest.
Acquisition
Current assets
$450,000
Capital assets, net
1,750,000
Goodwill
245,000
Total assets
$2,445,000
Current liabilities
$265,000
Long-term liabilities
420,000
Total liabilities
685,000
Common shares
1,300,000
Retained earnings
210,000
Total share equity of East Ltd.
1,760,000
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Document Summary
Only in the fourth alternative is prairie"s statement of financial position really a consolidated statement. In the first three alternatives, prairie is buying the assets (or net assets) of savannah, and those assets will be recorded directly on prairie"s books: share ownership and intercompany relationship: 20% by savannah inc. owned by prairie ltd. Fair value adjustment allocated to net identifiable assets (c b) Balance = goodwill/(gain on bargin purchase) (a c) 100% purchase of west company ltd. , december 31, 20x6. Less carrying value of west"s net identifiable assets (100%) Total fair value adjustment allocated to net identifiable assets and preferred shares. The total fair value of west company, including the value of the preferred shares is. Under ifrs, the full fair value of the acquiree can also be calculated as the purchase price paid by the acquirer for its shares plus the fair value of the non-controlling interest.
