Find more at www.downloadslide.com CHAPTER SOLUTIONS TO MULTIPLE CHOICE QUESTIONS, EXERCISES AND PROBLEMS MULTIPLE CHOICE QUESTIONS b Only the advanced production technology and customer lists intangibles meet the contractual or separability criteria c $40,000 - $400 = $39,600 b Outside consultants costs are expensed a This is a post-acquisition event, and does not adjust the date-of-acquisition value of the equipment The reduction in value is a loss, reported on the income statement c This change in value occurs in the measurement period, and corrects the original acquisition entry The correction is: Goodwill 2,000 Identifiable intangible assets 2,000 c $60,000 – ($4,200 + $6,000 + $14,000 + $4,000 + $1,000 - $2,000 - $11,600) = $44,400 b $8,000 – ($4,200 + $6,000 + $14,000 + $500 - $2,000 - $11,600) = $(3,100) d Favorable location does not meet the contractual or separable criteria Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com d The Codification requires capitalization of acquired in-process R&D regardless of its alternative future use or probability of success 10 a Warranty liabilities are known liabilities, and are likely to be estimable within the measurement period The others are “other contingencies” and less likely to have measurable fair values at the date of acquisition ©Cambridge Business Publishers, 2013 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com EXERCISES E2.1 Recording a Merger and a Stock Acquisition a Cash and receivables Equity method investments Inventory Plant assets Goodwill Merger expenses 120,000 200,000 400,000 1,000,000 3,720,000 175,000 Current liabilities Long-term debt Cash 340,000 1,100,000 4,175,000 b Investment in Slys Merger expenses 4,000,000 175,000 Cash 4,175,000 E2.2 Post-Combination Balance Sheet: Three Types of Combinations a Allen makes the entries shown below in cases (1), (2) and (3), respectively: (1) Cash Other current assets Property, plant and equipment Goodwill 50,000 150,000 400,000 50,000 Current liabilities Long-term liabilities Cash 100,000 250,000 300,000 (2) Investment in Benson 300,000 Cash 300,000 (3) Other current assets Property, plant and equipment Goodwill 150,000 400,000 50,000 Current liabilities Long-term liabilities Cash Solutions Manual, Chapter 100,000 250,000 250,000 ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com E2.2 continued a continued Allen’s post-acquisition balance sheet for each case is as follows: Allen Corp Post-combination Balance Sheet Case (1) Case (2) Cash $ 150,000 $ 100,000 Other current assets 750,000 600,000 Property plant and equipment 1,600,000 1,200,000 Investment in Benson -300,000 Goodwill 50,000 $2,550,000 $2,200,000 Current liabilities $ 400,000 $ 300,000 Long-term liabilities 850,000 600,000 Common stock 200,000 200,000 Additional paid-in capital 300,000 300,000 Retained earnings 800,000 800,000 $2,550,000 $2,200,000 b Case (3) $ 150,000 750,000 1,600,000 -50,000 $2,550,000 $ 400,000 850,000 200,000 300,000 800,000 $2,550,000 In the stock acquisition case, total assets are unchanged from Allen's pre-combination balance sheet, reflecting the payment of $300,000 cash and the acquisition of a $300,000 stock investment In the merger and asset acquisition cases, total assets increase by $350,000 Cash of $300,000 was paid to acquire assets recorded at $650,000 (including $50,000 of goodwill) Note that $350,000 in liabilities were also recorded, so that there was no change in Allen's net assets c Cash Benson Corp Post-Acquisition Balance Sheet $300,000 Common Stock Additional Paid-in Capital _ Retained Earnings $300,000 $100,000 50,000 150,000 $300,000 Benson's only asset is $300,000 cash, consisting of its $50,000 prior balance plus $250,000 received from Allen in exchange for all its previous noncash assets and liabilities The noncash assets and liabilities sold had a net book value of $200,000 The $50,000 gain on the sale is reflected in retained earnings ©Cambridge Business Publishers, 2013 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com E2.3 Recording an Acquisition (in millions) Cash and cash equivalents Accounts receivable, net Other assets Property, plant and equipment Customer relationships Technology Non-compete agreements Tradenames Merger expenses Goodwill 266 410 58 323 1,081 44 39 10 116 2,327 Deferred tax liability, net Other liabilities Cash E2.4 424 256 3,994 Bargain Purchase a Price paid Fair value of identifiable net assets: Marketable securities Land Buildings Equipment Identifiable intangibles Other net assets Gain on acquisition $ 3,000,000 $ 100,000 800,000 500,000 300,000 1,300,000 200,000 $ 3,200,000 200,000 b Marketable securities Land Buildings Equipment Identifiable intangibles Other net assets 100,000 800,000 500,000 300,000 1,300,000 200,000 Cash Gain on acquisition Solutions Manual, Chapter 3,000,000 200,000 ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com E2.5 Goodwill and Bargain Purchase (amounts in thousands) Current assets Plant assets Identifiable intangibles Goodwill Liabilities Cash Gain on acquisition Case 300 600 700 200 800 1,000 Case 400 800 300 Case 50 1,430 200 -500 300 1,000 1,000 -380 E2.6 Changes in Acquisition Values a The value changes occurred during the measurement period We know this because goodwill is adjusted, implying that the initial acquisition entry has been corrected b Identifiable intangible assets Goodwill Earnings contingency liability 34 Inventories Plant and equipment, net Long-term liabilities E2.7 30 10 Acquisition Cost Tangible assets Intangible assets Goodwill Merger expenses 25,000,000 90,000,000 100,000,000 900,000 Liabilities Cash Common stock Additional paid-in capital ©Cambridge Business Publishers, 2013 55,000,000 101,650,000 1,500,000 57,750,000 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com E2.8 Identification of Reportable Intangibles a Identifiable intangibles are to be recorded in a business combination Identifiable intangibles include those arising from contractual and other legal rights and those which are separable Of the eight intangibles listed, four appear to be based on contractual and other legal rights: Signed customer contracts Internet domain name Office leases Registered company name and trademark $1,000,000 150,000 100,000 60,000 One additional item appears to be separable, capable of being sold, licensed, or otherwise transferred: Proprietary databases of industry data $ 50,000 The remaining three items appear to neither be based on contractual/legal rights nor separable b Price paid Fair value of identifiable net assets: Tangible net assets Signed customer contracts Internet domain name Office leases Registered company name and trademark Proprietary databases Goodwill Solutions Manual, Chapter $ 2,400,000 $ 400,000 1,000,000 150,000 100,000 60,000 50,000 1,760,000 $ 640,000 ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com E2.9 Preacquisition Contingency Original acquisition entry: Current assets Noncurrent assets Goodwill 850,000 1,600,000 130,000 Estimated liability-lawsuits Other liabilities Cash 280,000 500,000 1,800,000 The reduction in the estimated liability from $280,000 to $200,000 is the result of new information on liability value as of the acquisition date, so the reduction is treated as a correction of the original acquisition entry, within the measurement period Change in pre-acquisition liability within measurement period: Estimated liability-lawsuits Goodwill 80,000 80,000 Changes in the estimated liability due to new information and events occurring after the acquisition date are reported in income Change in pre-acquisition liability after measurement period: Loss on contingent liability Estimated liability-lawsuits 150,000 150,000 E2.10 Contingent Consideration a The expected present value of the earnings contingency is calculated as follows: Value of stock issued $200,000 400,000 500,000 x x x x Probability 0.25 0.40 0.35 = = = = Expected value $ 50,000 160,000 175,000 $ 385,000 $385,000/(1.10)2 = $318,000 (rounded to nearest thousand) The expected present value of the stock price contingency is calculated as follows: Value of stock issued x Probability = Expected value $10,000,000 – 6,000,000 = $4,000,000 x 0.10 = $ 400,000 $10,000,000 – 9,000,000 = $1,000,000 x 0.20 = 200,000 $ 600,000 $600,000/(1.10)2 = $496,000 (rounded to nearest thousand) ©Cambridge Business Publishers, 2013 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com E2.10 continued a continued Plank reports the initial acquisition as follows: Current assets Property, plant and equipment Intangibles Goodwill 2,000,000 12,000,000 3,000,000 6,814,000 Liabilities Contingent consideration liability Common stock (par $1) Additional paid-in capital Additional paid-in capital – contingent consideration Cash b 8,000,000 318,000 250,000 9,750,000 496,000 5,000,000 (1) If the value change occurs within the measurement period, the acquisition entry is adjusted: Goodwill 100,000 Contingent consideration liability 100,000 (2) If the value change occurs after the measurement period (and is therefore due to events subsequent to the acquisition), the value change is reported in earnings: Loss on earnout 100,000 Contingent consideration liability Solutions Manual, Chapter 100,000 ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com E2.11 In-Process R&D, Other Previously Unreported Intangibles, Goodwill The in-process R&D and patent rights meet Codification requirements for capitalization The contracts under negotiation with potential customers and the skilled workforce not meet the contractual or separability criteria, so these assets are reported as part of goodwill The acquisition entry is as follows: Current assets Plant assets In-process R&D Patent rights Goodwill 500,000 700,000 2,500,000 3,000,000 23,750,000 Liabilities Common stock (par $0.50) Additional paid-in capital 450,000 1,000,000 29,000,000 E2.12 Valuation of Earnings Contingency The expected payment is computed as follows: (6,500,000 – 5,500,000) x $0.50 x 0.25 = (7,500,000 – 5,500,000) x $0.50 x 0.20 = $ 125,000 200,000 $ 325,000 The payment takes place at the end of the year, so the present value is: $325,000/(1.06) = $306,604 ©Cambridge Business Publishers, 2013 10 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com PROBLEMS P2.1 Acquisition Entries, Various Types of Combinations, Acquisition Costs a Books of Plastic Corporation Cash and receivables Inventory Equity method investments Land Buildings and equipment Patents Goodwill Merger expenses 35,000 45,000 20,000 11,000 14,000 10,000 12,000 25,000 Liabilities Cash b 22,000 150,000 Assume all fair value estimates have been reassessed and are considered accurate The journal entry made by Plastic to record the merger appears below Books of Plastic Corporation Cash and receivables Inventory Equity method investments Land Buildings and equipment Patents Merger expenses 35,000 45,000 20,000 11,000 14,000 10,000 10,000 Liabilities Cash Gain on acquisition c 22,000 110,000 13,000 Books of Plastic Corporation Investment in Steel Merger expenses 135,000 15,000 Cash Solutions Manual, Chapter 150,000 ©Cambridge Business Publishers, 2013 11 Find more at www.downloadslide.com P2.2 Identification of Acquirer and Balance Sheet Valuation a (1) Current assets Property, plant and equipment Identifiable intangibles (2) Current assets Property, plant and equipment Identifiable intangibles b $100,000 250,000 80,000 90,000 $520,000 Barcel Inc Balance Sheet October 4, 2013 $150,000 Current liabilities 550,000 Long-term debt 75,000 Common stock _ Retained earnings $775,000 $100,000 505,000 60,000 110,000 $775,000 Fair values are recorded only for the acquired company; net assets of the acquiring company remain at book value A reconciliation is provided below Book value of Axtel’s assets Book value of Barcel’s assets Fair value adjustments recorded for: Axtel’s assets Barcel’s assets Post-combination recorded assets c Axtel Inc Balance Sheet October 4, 2013 $ 65,000 Current liabilities 375,000 Long-term debt 80,000 Common stock _ Retained earnings $520,000 Case (1) $240,000 200,000 Case (2) $240,000 200,000 – 80,000 $520,000 335,000 – $775,000 In this situation, it is likely that Coppel is being formed by the combining parties One of the combining entities must be designated the acquiring company Both Axtel and Barcel are of equal size in terms of book value of stockholders= equity Axtel is larger in terms of fair value of net assets Axtel stockholders also receive the majority interest (60%) in the new company Thus, Axtel would likely be designated the acquiring company Current assets Property, plant and equipment Identifiable intangibles ©Cambridge Business Publishers, 2013 12 Coppel, Inc Balance Sheet October 4, 2013 $ 65,000 Current liabilities 375,000 Common stock 80,000 Retained earnings $520,000 $100,000 330,000 90,000 $520,000 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P2.3 Acquisition Adjustments and Merger Costs (all amounts in thousands) a The goodwill balance on GameStop’s balance sheet represents the sum of reported goodwill on all its acquisitions GameStop apparently made prior acquisitions where the acquisition price exceeded the fair values of acquired identifiable net assets b Balance at February 3, 2007 Reduction in goodwill by revision of accrued merger-related liabilities Additional purchase price adjustments Goodwill at February 2, 2008 c $ 1,403,907 (406) (1,061) $ 1,402,440 Adjustments to the original amount of goodwill recorded must occur within the measurement period, and relate to clarifications of the fair values of identifiable assets and liabilities acquired, preacquisition contingencies, earnout or stock price contingency values included as part of the acquisition price, as of the date of acquisition If the purchase price adjustments reduce goodwill, this implies that the revisions in value either increased the reported fair values of identifiable assets or preacquisition contingencies reported as assets, or reduced identifiable liabilities, earnouts, stock price contingencies, or preacquisition contingencies reported as liabilities d Prior to 2009, merger-related costs, such as legal or consulting fees, were reported as a part of the acquisition cost, increasing goodwill Under current GAAP, these costs are expensed as incurred and not impact the value of assets and liabilities acquired According to the GameStop disclosure, $612 in merger-related liabilities were accrued, increasing goodwill As of February 2, 2008, the actual payments for merger-related costs were only $206, so the estimated costs were $406 too high and therefore goodwill was adjusted downward by that amount Following current requirements, the $206 in merger-related costs that remain as part of the current goodwill balance would not be reported as goodwill but would instead be treated as expenses Therefore goodwill at February 2, 2008 would be $1,402,234 (= $1,402,440 – 206) Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 13 Find more at www.downloadslide.com P2.4 Type of Business Combination, Identification of Acquiring Company a Corporate History: 11/96: Babbage’s is formed 10/99: Babbage’s acquired by, and becomes wholly-owned subsidiary of, Barnes & Noble 6/00: Barnes & Noble acquires Funco, Inc.; Babbage’s becomes a wholly-owned subsidiary of Funco 12/00: Funco changes its name to GameStop, Inc 8/01: The original GameStop Corp (now referred to as “Historical GameStop”) is incorporated as a holding company for GameStop, Inc 2/02: Historical GameStop issues 41,528,000 shares in a public offering Barnes & Noble receives 72,018,000 shares for its ownership of GameStop, Inc 10/04: Historical GameStop repurchases and retires 12,214,000 shares from Barnes & Noble Barnes & Noble distributes its remaining 59,804,000 shares to its shareholders as a dividend GameStop Holdings Corp is formed, and all stock is converted to stock of that company 4/05: GSC Holdings Corp is formed for the purpose of completing the business combination of GameStop Holdings Corp (formerly GameStop Corp or “Historical GameStop”) and Electronics Boutique Holdings Corp 10/05: The above merger is completed GSC Holdings Corp changes its name to GameStop Corp b This combination was a statutory consolidation GSC Holdings Corp was formed to acquire GameStop Holdings Corp and Electronics Boutique Holdings Corp c GameStop Holdings’ stockholders had the larger voting interest in the combined company – they received 104,135,000 shares compared to 40,458,000 shares for the former Electronics Boutique stockholders There is not enough information to assess the other criteria d The acquisition price of Electronics Boutique was $1,430,398,000 This may be determined as the total consideration paid of $1,443,956,000 minus the transactions costs (merger expenses) of $13,558,000, or as the value of the stock given to EB stockholders $437,144,000 plus the cash paid for EB stock and stock options $993,254,000 ©Cambridge Business Publishers, 2013 14 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P2.5 Identifiable Intangibles and Goodwill a Acquisition cost (1,000,000 shares @ $35) Identifiable net assets acquired: Cash Accounts receivable Parts inventory Equipment Intangible: Lease Intangible: Service contracts Intangible: Trade name Current liabilities Long-term liabilities Goodwill $35,000,000 $ 300,000 2,600,000 6,000,000 19,500,000 1,250,000 2,000,000 200,000 (3,100,000) (8,000,000) 20,750,000 $14,250,000 Note: The lease, service contracts, and trade name qualify as identifiable intangibles, as they are based on legal or contractual rights The work force does not qualify as an identifiable intangible, as it is neither separable nor based on legal/contractual rights Thus the work force value is included as part of goodwill b Prince’s journal entry to record the merger is as follows: Cash Accounts receivable Parts inventory Equipment Intangible: Lease Intangible: Service contracts Intangible: Trade name Goodwill Merger expenses Cash (1) Current liabilities Long-term liabilities Capital stock (2) 300,000 2,600,000 6,000,000 19,500,000 1,250,000 2,000,000 200,000 14,250,000 1,200,000 1,800,000 3,100,000 8,000,000 34,400,000 Notes: (1) Cash paid for professional fees ($1,200,000) and registration and issue costs ($600,000) (2) Proceeds from stock issue ($35,000,000) less registration and issue costs ($600,000) No par value is specified, so it is not possible to distinguish common stock at par value from additional paid-in capital Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 15 Find more at www.downloadslide.com P2.6 Goodwill a The following business factors or conditions might give rise to goodwill: b c Well-trained, motivated, and cooperative employees, and superior management Product-related factors such as reputed high quality Exclusive processes or formulas Loyal customer base Favorable or unusual location, and good distribution channels (amounts in millions) Cost of Toga Corporation to Lisa Corporation Fair market value of the identifiable assets and liabilities: Accounts receivable Inventories Long-term marketable debt securities Property, plant and equipment Total assets Less: Current liabilities Total fair market value of identifiable net assets Goodwill $ 780 $ 40 135 115 410 700 (70) 630 $ 150 Goodwill is recorded as an asset only when acquired from another enterprise, i.e., Lisa Corporation's purchase of Toga Corporation The goodwill was not included on Toga Corporation's balance sheet since the cost of developing, maintaining, or restoring intangible assets that are not specifically identifiable was expensed as incurred by Toga Corporation ©Cambridge Business Publishers, 2013 16 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P2.7 Bargain Purchase and Preacquisition Contingency a The entry below assumes the fair values of net identifiable assets acquired are accurate Cash and receivables Inventory Depreciable plant assets Other assets 6,400,000 5,800,000 6,500,000 3,000,000 Current liabilities Estimated lawsuit liability Long-term debt Capital stock Gain on acquisition b 5,000,000 800,000 1,800,000 10,000,000 4,100,000 The $500,000 decline in the value of the lawsuit is a clarification of value as of the date of acquisition and is within one year of the acquisition date Therefore the value change occurs within the measurement period, and the original acquisition entry is adjusted, as follows: Estimated lawsuit liability 500,000 Gain on acquisition c 500,000 The $100,000 increase in the value of the lawsuit is reported as a loss, and is not a correction in the original acquisition entry The entry to record settlement of the lawsuit is as follows: Estimated lawsuit liability Loss on lawsuit 300,000 100,000 Cash Solutions Manual, Chapter 400,000 ©Cambridge Business Publishers, 2013 17 Find more at www.downloadslide.com P2.8 Post-Combination Balance Sheet, Goodwill (all amounts in millions) Softdata makes the following entry to record the acquisition: Current assets Property, plant and equipment Patents and trademarks Brand names Software Goodwill Merger expenses 18 600 250 10 50 69 Current liabilities Long-term liabilities Common stock Additional paid-in capital Cash 15 900 0.5 68.5 15 Softdata’s post-acquisition balance sheet is as follows: Current assets ($100 – 12 – – + 18) Property, plant and equipment Patents and trademarks Brand names Software Goodwill Total assets ©Cambridge Business Publishers, 2013 18 $ 103 2,600 750 10 50 _69 $ 3,582 Current liabilities Long-term liabilities Common stock Additional paid-in capital Retained earnings ($245 – 2) Treasury stock Total liabilities and equity $ 215 2,400 10.5 718.5 243 _(5) $ 3,582 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P2.9 Merger Entry, Valuation Adjustments (all amounts in millions) a Price paid Fair value of identifiable net assets Goodwill $ 37,738 22,267 $ 15,471 b The following discussion appears in Sprint Nextel’s 2005 10-K: We paid a premium (i.e., goodwill) over the fair value of the net tangible and identified intangible assets of Nextel for a number of potential strategic and financial benefits that are expected to be realized as a result of the merger, including, but not limited to, the following: c the combination of extensive network and spectrum assets, which enables us to offer consumers, businesses and government agencies a wide array of broadband wireless and integrated communications services; the combination of Nextel’s strength in business and government wireless services with our position in consumer wireless and data services, including services supported by our global IP network, which enables us to serve a broader customer base; the size and scale of the combined company, which is comparable to that of our two largest competitors, is expected to enable more operating efficiencies than either company could achieve on its own; and, the ability to position us strategically in the fastest growing areas of the communications industry Because this acquisition took place prior to the current standards, Sprint used the announcement date share price to value the stock issued to Nextel’s former shareholders Currently, stock issued for acquisitions is valued at the share price when control changes hands, typically when the acquisition is completed One might argue that the announcement date stock price represents the intended acquisition cost However, the stock price at the date of acquisition better represents actual acquisition cost The difference between these two prices may not be an issue, however, if the acquiring company adjusts the amount of stock issued for changes in stock price between the announcement date and the acquisition date Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 19 Find more at www.downloadslide.com P2.9 continued d Current assets Property, plant and equipment Spectrum licenses and other indefinite life intangibles Customer lists and other definite life intangibles Investments Other assets SE – deferred compensation (1) Goodwill Merger expenses 5,501 8,454 14,640 10,448 2,680 111 518 15,471 78 Current liabilities Long-term debt Other long-term liabilities Common stock APIC – new stock issued APIC – stock options Cash 2,902 8,984 8,199 2,828 32,817 1,124 1,047 e Current assets Other long-term liabilities Goodwill 105 24 Property, plant and equipment Investments Current liabilities Shareholders’ equity – deferred compensation (1) 80 18 33 (1) Sprint’s disclosure does not identify the specific equity account affected by the deferred compensation It is likely that Sprint recorded the liability but the related expense does not yet appear on the income statement; in that case the original debit and the subsequent credit adjustment may be to accumulated other comprehensive income ©Cambridge Business Publishers, 2013 20 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P2.10 Earnings Contingency, In-Process R&D, Bargain Purchase (all amounts in thousands) a ($60,000 – $50,000) x = ($80,000 – $50,000) x = $20,000 x.08 $60,000 x 02 = = $2,800/(1.05)2 = b Price paid: Cash Earnout Total price Fair value of reported assets: Fair value of reported liabilities: Fair value of unreported IPR&D Gain on acquisition $1,600 1,200 $2,800 $2,540 $1,250,000 2,540 $1,252,540 $8,200,000 (7,850,000) (350,000) (1,000,000) $ 97,460 c Current assets Property, plant and equipment Patents In-process R&D 200,000 5,000,000 3,000,000 1,000,000 Liabilities Cash Contingent consideration liability Gain on acquisition 7,850,000 1,250,000 2,540 97,460 d Current assets Property, plant and equipment Patents In-process research & development Total assets Solutions Manual, Chapter $ 3,950,000 Liabilities 65,000,000 Capital stock 13,000,000 Retained earnings $42,852,540 25,000,000 15,097,460 1,000,000 $82,950,000 Total liabilities and equity _ $82,950,000 ©Cambridge Business Publishers, 2013 21 Find more at www.downloadslide.com P2.11 Bargain Gain, Contingent Consideration, and Changes in Estimates (in thousands) a Inventory Machinery and equipment Land and buildings Accounts receivable Prepaid expenses Trade names and trademarks Unpatented technology Merger expenses 1,841 1,716 2,610 464 420 670 54 Accounts payable Accrued expenses Deferred tax liability Cash Common stock Notes payable Contingent consideration liability Gain on acquisition 144 150 1,557 154 250 2,580 30 2,915 b Gain on acquisition Goodwill 2,915 257 Inventory Machinery and equipment Land and buildings Contingent consideration liability 841 916 1,410 c Loss 3,172 Inventory Machinery and equipment Land and buildings Contingent consideration liability d 841 916 1,410 The entry would be the same, except the contingency consideration fair value would not be adjusted; the loss would be $3,167 ©Cambridge Business Publishers, 2013 22 Advanced Accounting, 2nd Edition Find more at www.downloadslide.com P2.12 Multiple Asset Acquisitions, Analysis of Combination Terms a b Reconciliation of shares issued, as per balance sheet: Shares issued as of March 31, 2008 Shares issued as of June 30, 2007 Increase in shares 49,509,829 15,764,842 33,744,987 Shares issued to Alternative Energy Shares issued to Boreal for wind project assets Shares issued to Boreal for Navitas stock Shares issued for cash Shares issued to executives Total shares issued 4,000,000 18,500,000 10,000,000 1,159,987 85,000 33,744,987 Dollar amount assigned to shares issued: (1) Per analysis of asset accounts: Increase in wind farm assets Increase in wind projects assets Increase in Navitas stock Increase in goodwill Less: acquisitions for cash Calculated value of shares issued (2) $ 3,150,000 13,096,175 11,287,250 1,387,750 (851,175) $28,070,000 Per analysis of equity accounts: Increase in common stock account Increase in additional paid-in capital account Less: cash received for issued shares Less: value assigned to shares issued to executives Calculated value of shares issued $ 1,687,249 27,374,667 (945,416) (76,500) $28,040,000 Note to instructor: There are slight unexplained differences between these two calculated values and the value disclosed on the company’s cash flow statement Solutions Manual, Chapter ©Cambridge Business Publishers, 2013 23 Find more at www.downloadslide.com P2.12 continued c Per share valuations for each acquisition: Wind farms from Northern Alternative Energy, $3,150,000, divided by 4,000,000 shares, equals $.7875 per share Wind projects from Boreal, $13,632,750 ($13,096,175 increase in wind project assets, less $851,175 acquired for cash, plus $1,387,750 goodwill), divided by 18,500,000 shares, equals $.7369 per share Navitas stock acquired from Boreal, $11,287,250, divided by 10,000,000 shares, equals $1.1287 per share The first two were valued below the market value of the shares when the acquisition occurred, and the third may have been as well A reason for this is that the issuance of a large number of shares relative to the number already outstanding likely would have depressed the prevailing market price Note that the shares sold for cash averaged $.8150 per share d The company’s MD&A disclosed the following: Our valuation of Boreal assets was based on a number of tangible and intangible factors including the book value of certain assets on Boreal’s audited balance sheet, the development status of certain wind farms now underway, the extensive Boreal pipeline of future prospects, recent industry transactions reflecting value creation payments for completed wind farms and early stage pipeline prospects, anticipated price/earnings ratios from comparisons to peer group public companies, and other considerations of the Board of Directors of the Company e The acquired assets need to be carefully estimated in terms of their fair values, including previously unreported identifiable intangibles Assuming this is a business combination subject to ASC Topic 805 requirements, if the cost (the recorded amount of Navitas stock) exceeds the fair value of the identifiable net assets acquired, goodwill will be recorded If the fair value of net identifiable assets acquired exceeds the cost, a gain on acquisition will be recorded ©Cambridge Business Publishers, 2013 24 Advanced Accounting, 2nd Edition ... and equipment Goodwill 150,000 400,000 50,000 Current liabilities Long-term liabilities Cash Solutions Manual, Chapter 100,000 250,000 250,000 ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com... Other net assets 100,000 800,000 500,000 300,000 1,300,000 200,000 Cash Gain on acquisition Solutions Manual, Chapter 3,000,000 200,000 ©Cambridge Business Publishers, 2013 Find more at www.downloadslide.com... domain name Office leases Registered company name and trademark Proprietary databases Goodwill Solutions Manual, Chapter $ 2,400,000 $ 400,000 1,000,000 150,000 100,000 60,000 50,000 1,760,000 $ 640,000