Acquisition Method

Question 1

Acquisition method = what is the consolidated equity ?

Answer 1

= Parent company CAR or Stockholder’s equity + Fair Value of non controlling interest( FV of Sub * NCI %)

Question 2

How are business combination cost/expense accounted

Answer 2

• Finding fees, legal fees are expensed.
• Stock registration and issuance cost such as SEC filling fees are subsytacted in PARENT APIC
• Indirect Cost are expensed as incurred
• Bond issue cost are capitalized and amortized

Question 3

how do you account for NI under the acquisition method?

Answer 3

Just like in the Equity method, if the parent owns 75% of the

Question 4

Acquisition Method

Answer 4

(CAR) Sub stockholder’s equity is eliminated at book value
IN( Parent investment in sub or acquisition cost is eliminated at acquisition cost) + Non controlling interests in any

BIG (Balance sheet of subs is eliminated at) and adjusted to FaiR Value.
Identifiable intangible assets recorded at Fair Value

gain/or good will recorded ( goodwill if CA and Fair Value of asset lower than acquisition price)
Gain if CA or FAIR Value higher than acquisition price)

Question 5

What is the asset under the consolidated BS for Company A and Company B

Answer 5

= total Asset of Parent + Total Asset of Sub + adjustment to Fair Value of asset from Sub

Question 6

Acquisition Method - Adjusted RE

Answer 6

under the acquisition method the consolidated RE is equal to the parent RE. Always check if the Balance Sheet presented is adjusted or unadjusted.

Question 7

Transaction evaluation of parent company sale of shares from Control (over 50%) to non-control ( less than 50%)

Answer 7

= Gain/loss on sale of shares + re-evaluation gain/losses of shares still on hand.

Question 8

Transaction evaluation of parent company acquiring more shares of sub ( non-control to control ex: 10 % to 85% )

Answer 8

1- calculate FV of sub for 100 %
2- new FV of old acquisition = 100% FV * 10%
3- subtract CV of old acquisition
= gain
Redo example pg 42

Question 9

IFRS Partial goodwill method

Answer 9

apply only % of ownership in calculation of goowill
ex: if parent acquired 75% of sub.
when calculating goodwill
start 75% CA + 75% of FV of Balance + identified intangible

Question 10

GAAP full goodwill method

Answer 10

your base is purchase price + NCI

use full amount for calculation of goodwill

Question 11

NCI under IFRS partial goodwill method

Answer 11

= FV of Subs Net Asset (total Asset + FV adjust - total Liab) * NCI %

Question 12

a 80% owned subsidiary declares and pays cash dividends . What effect that the dividend have in RE and Non Controlling interest of the parent company consolidated balance sheet

Answer 12

1- dividend paid are subtracted from the Investment in sub account, which has nothing to do with RE. However Income Increase NCI and Dividend Decrease NCI account

Question 13

Company A acquired 100% shares of company b by exchanging 10,000 shares of its common stock with a FV of 90,000 for 100 000 shares of company B common stock with a FV of 350,000. What is the acquisition price to be used.

Answer 13

The acquisition price to be used is the price paid by the parent of 90,000

Question 14

Damon Co. purchased 100% of the outstanding common stock of Smith Co. in an acquisition by issuing 20,000 shares of its $1 par common stock that had a fair value of $10 per share and providing contingent consideration that had a fair value of $10,000 on the acquisition date. Damon also incurred $15,000 in direct acquisition costs. On the acquisition date, Smith had assets with a book value of $200,000, a fair value of $350,000, and related liabilities with a book and fair value of $70,000. What amount paid by Damon ?

Answer 14

total amount paid by Daemon

= (20,000*10) + contingent consideration (10) = 210

Question 15

Damon Co. purchased 100% of the outstanding common stock of Smith Co. in an acquisition by issuing 20,000 shares of its $1 par common stock that had a fair value of $10 per share and providing contingent consideration that had a fair value of $10,000 on the acquisition date. Damon also incurred $15,000 in direct acquisition costs. On the acquisition date, Smith had assets with a book value of $200,000, a fair value of $350,000, and related liabilities with a book and fair value of $70,000. What is the total gain recorded

Answer 15

1- Calculate Book value of Net Asset: BV Asset - BV of Liab
= 200-70 = 130
2- Calculate FV adj; 150
3- subtract total to amount paid (130+150) - 210 = 70

Note: any direct expenses are not included in calculation of gain.

Question 16

West, Inc. acquired 60% of East Co.’s outstanding common stock. West paid $800,000 to acquire the stock. West plans to relocate East’s company headquarters, which is expected to cost between $100,000 and $300,000. The present value of the probability-adjusted relocation cost is $240,000. What is West’s acquisition cost?

Answer 16

The acquisition cost of the stock does not include any measure of the relocation costs associated with East’s company headquarters. (Such costs are accounted for separately from the acquisition according to the requirements for exit or disposal costs in FASB ASC 420.) The investment would be valued at the fair value of the consideration given which is $800,000