Determining the cost of the business acquired

Question 1

Tools:

Answer 1

• Decomposition tool (again)

Question 2

How do you determine the cost of the business?

Answer 2

It is the summation of the consideration (what you give) this may include:

• Cash or assets
• Equity Securities
• Contingent consideration
• Replacement of share-based payments

Question 3

What are CPA Exam Questions for this section?

Answer 3

What is included or excluded from the purchase price?

What value do you measure the consideration included in the purchase price?

Question 4

Example: Transfer land and cash for the acquisition. How do you measure the consideration? (assuming the land is transferred to the shareholders and not to the corporation itself)

Answer 4

Revaluate the asset.

Assume the land had carrying value of $126,000 and a fair value of $150,000.

ENTRIES:
LAND. $24,000
Gain. (24,000)

Investment in S $650,000
Cash (500,000)
Land. (150,000)

Question 5

Example: Transfer land and cash for the acquisition. How do you measure the consideration? (Assume the land is transferred to S corporation)

Answer 5

Do not reevaluate the asset because P will still have control over the land.

Question 6

What is contingent consideration?

Answer 6

Contingent consideration is an obligation or right that depends on future outcome.

Liability of the acquirer (if you pay in cash)
Equity (future equity).

Question 7

What happens if the contingent consideration fails to occur (right of return)

Answer 7

if the company being acquired does not meet the target agreed upon they may have to pay money back to the acquirer.

Record as an asset (receivable)

Question 8

What are replacement of share-based payments?

Answer 8

Employees who have equity options in the company being acquired will receive equity options in the acquiring company. This is not required, but if the new parent company wants to retain those employees, this is a good option

Question 9

Are share-based payments included in the acquisition price of the entity?

Answer 9

If the value of the new shares are more than what the employees had previously, then you are essentially giving them compensation expense. This is a post combination expense and not included purchase price.

You only include if it is required by LAW. if it is NOT required it is a post-acquisition cost.