Ch01 Beams12ge SM

8/17/2019 Ch01 Beams12ge SM

1/11

Chapter 1

BUSINESS COMBINATIONS

Answers to Questions

1 According to IFRS 3, business combination is a process !ere a business entit" ac#uires one or moreot!er business entities$ A business is de%ined as &an integrated set o% acti'ities and assets t!at is capab(e o%

being conducted and managed %or t!e purpose o% pro'iding a return in t!e %orm o% di'idends, (oer costsor ot!er economic bene%its direct(" to in'estors or ot!er oners, members or participants)$ T!is s!ost!at a business entit" s!ou(d !a'e t!ree c!aracteristics* +- an input, !ic! is a set o% acti'ities and assets,+.- a process, !ic! is managing and conducting t!e input, and +3- an output, !ic! is t!e return %romconducting t!e process$ For e/amp(e, a business purc!ased a %actor"0 norma((" t!is s!ou(d be an ac#uisition o% assets, !oe'er, i%

b" purc!asing t!e %actor", t!e entit" a(so !iring its management and or1ers o% t!at certain %actor" t!iss!ou(d be a business combination$ T!e %actor" itse(% acted as an input, !i(e t!e management and or1ersare a part o% t!e process, and t!e products produced or an" ot!er economic bene%its suc! as cost reductionis t!e output$ T!is transaction is no a business combination$

2 T!e disso(ution o% a(( but one o% t!e separate (ega( entities is not necessar" %or a business combination$ Ane/amp(e o% one %orm o% business combination in !ic! t!e separate (ega( entities are not disso('ed is !enone corporation becomes a subsidiar" o% anot!er$ In t!e case o% a parent2subsidiar" re(ations!ip, eac!combining compan" continues to e/ist as a separate (ega( entit" e'en t!oug! bot! companies are under t!econtro( o% a sing(e management team$

3 A business combination occurs !en to or more pre'ious(" separate and independent companies are broug!t under t!e contro( o% a sing(e management team$ Merger and conso(idation in a generic sense are%re#uent(" used as s"non"ms %or t!e term business combination$ In a tec!nica( sense, !oe'er, a merger isa t"pe o% business combination in !ic! a(( but one o% t!e combining entities are disso('ed and aconsolidation is a t"pe o% business combination in !ic! a ne corporation is %ormed to ta1e o'er t!eassets o% to or more pre'ious(" separate companies and a(( o% t!e combining companies are disso('ed$

4 In August , FASB issued a report to e(iminate t!e poo(ing o% interest met!od because o% t!e %o((oing

reasons* +- poo(ing pro'ides (ess re(e'ant in%ormation to statement users, +.- poo(ing ignores economic'a(ue e/c!anged in t!e transaction and ma1es subse#uent per%ormance e'a(uation impossib(e and +3-comparing %irms using t!e a(ternati'e met!ods is di%%icu(t %or in'estors$

T!e abo'e prob(ems occurred because t!e poo(ing interest met!od uses !istorica( boo1 'a(ue rat!er t!ant!e %air 'a(ue to recogni4e t!e net assets at t!e transaction date$

5 In a business combination, goodi(( is t!e e/cess o% in'estment cost o'er t!e %air 'a(ue o% t!e in'estee5sidenti%iab(e net assets$ Under t!e 6AA7 and IFRS, goodi(( arising %rom a business combination s!ou(d

be recorded as an asset$ 6oodi(( s!ou(d not be amorti4ed because it !as inde%inite use%u( (i%e, rat!er, its!ou(d be tested %or an" impairment at (east annua(("$

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2


2/11

1-2 Business Combinations

SOLUTIONS TO EXERCISES

Solution E1-1

1 a

2 b

3 a4 c

Solution E1-2 [AICPA adapted]

1 a

Pant and e!uipment shoud be recorded at the "220#000 $air %aue&

2 c

In%estment cost "1#'00#000

Less( )air %aue o$ net assets

Cash " 1'0#000In%entory *+0#000

Property and e!uipment 8 net 1#120#000

Liabiities ,*'0#000- 1#*00#000

.ood/i " *00#000

Solution E1-3

Additional Capital — PT Pratama Tbk Corporation on March 10

Ecess o$ $air %aue o%er par %aue o$ each share( "0 "20 3 "20

Additiona paidin capita $rom stoc4s issuance "20#000#000

[1#000#000 shares "20]

Less( cost o$ registering and issuing# printing

and dei%ering the shares "20#000

["200#000 6 "50#000 6 "20#000]

Additiona paidin capita that shoud be recorded "17#*0#000



3/11

Chapter 1 1-3

Solution E1-4

Goodwill/Gain – Summer Inc.

)air %aue o$ 8ummer Inc&9s net assets on :uy 1

[" 12#000 6 "15#000 6 "*2#000 6"0#000

"15#000 ; "25#000]

"57#000#000

Less( purchase price to ac!uire 8ummer Inc& "50#000#000

.ain $rom bargain purchase "7#000#000

,)air %aue o$ 8ummer Inc&9s net assets

eceeded the purchase price-



4/11


Solution E1-5

ournal entrie! on the book! o" Pan Corporation to record mer#er with Si!

Corporation

Accounts payabe 2#500

onds payabe 10#000

?ecogni@ed iabiities "20#000

=ote( assets and iabiities in business combinations are recorded at $air

%aue instead o$ boo4 %aue&



5/11

Chapter 1 1-5

SOLUTIONS TO PROBLEMS

Solution P1-1

In%estment in 8ung Ltd ,6A- 11#000#000

Common stoc4# "10 par ,68E- 5#000#000

Additiona paidin capita ,68E- 5#000#000

Cash ,A- 1#000#000

o record issuance o$ 500#000 shares o$ "10 par common stoc4

pus "1#000#000 cash in a business combination /ith 8ung

Ltd&

Cash ,6A- 2#000#000

rade recei%abes ,6A- +00#000

In%entories ,6A- *#000#000

Prepaid epenses ,6A- 1#000#000

Land ,6A- '#+00#000>uidingnet ,6A- 10#100#000

E!uipmentnet ,6A- *#000#000

rade payabe ,6L- 1#500#000

=otes payabe ,6L- #'00#000

>onds payabe ,6L- #100#000

In%estment in 8ung Ltd ,A- 11#000#000

.ain $rom >argain Purchase ,.a# 68E- 2#500#000

o assign the cost o$ 8ung Ltd to identi$iabe assets ac!uired and iabiities

assumed on the basis o$ their $air %aues and to recogni@e the gain $rom a

bargain purchase&



6/11


Solution P1-2

Preliminar$ computation!

Additiona paidin capita $rom additiona stoc4 issuance

[200#000 shares "10]

"2#000#000

Common stoc4# "10 par $rom additiona stoc4 issuance "+#000#000["10#000#000 "2#000#000]

Purchase price( Cost o$ in%estment in Caros 8A "10#000#000

Less( )air %aue o$ Caros 8A at Becember *1 "7#000#000

["1#000#000 6 "12#000#000 6"1*#000#000 "#000#000

"1*#000#000]

Ecess o$ purchase price o%er $air %aue ,good/i- "1#000#000

Jose S

>aance 8heet

At Becember *1 ,A$ter the >usiness Combination-

A!!et!

Current a!!et!

Cash ["2#000#000 6 "1#000#000] "*#000#000

ther current assets ["1*#000#000 6 "12#000#000] "25#000#000

Pant assets ["15#000#000 6 "1*#000#000] "2+#000#000

.ood/i " 1#000#000

ota assets "5#000#000

%iabilitie! and Stockholder!& '(uit$

%iabilitie!

Current iabiities ["5#000#000 6 "#000#000] " 7#000#000

ther iabiities ["12#000#000 6 "1*#000#000] "25#000#000

Stockholder!& e(uit$

Additiona paidin capita "2#000#000

Common stoc4# "10 par ,"10#000#000 6"+#000#000- "1+#000#000

?etained earnings "*#000#000

ota iabiities and stoc4hoders9 e!uity "5#000#000



7/11

Chapter 1 1-7

Solution P1-3

Par i!!ue! )*+000 !hare! o" !tock "or Sin&! out!tandin# !hare!

1a In%estment in 8in 1#500#000

Capita stoc4# "10 par 250#000

Additiona paidin capita 1#250#000o record issuance o$ 25#000# "10 par shares /ith a mar4et price

o$ "'0 per share in a business combination /ith 8in&

In%estment epenses '0#000

Additiona paidin capita 0#000

Cash 100#000

o record costs o$ combination in a business combination /ith 8in&

Cash 20#000

In%entories 120#000

ther current assets 200#000

Land 200#000

Pant and e!uipment 8 net 00#000

.ood/i *'0#000

Liabiities 100#000In%estment in 8in 1#500#000

o assign in%estment cost to identi$iabe assets and iabiities

according to their $air %aues and the remainder to good/i&

.ood/i is computed( "1#500#000 cost "1#10#000 $air %aue o$

net assets ac!uired&

1! Pa" Co"#o"ation

>aance 8heet

:anuary 2# 2011

,a$ter business combination-

A!!et!

Cash ["20#000 6 "20#000 "100#000] " 1'0#000

In%entories ["100#000 6 "120#000] 220#000

ther current assets ["200#000 6 "200#000] 00#000

Land ["1'0#000 6 "200#000] *'0#000

Pant and e!uipment 8 net ["1#*00#000 6 "00#000] 2#000#000

.ood/i *'0#000

ota assets "*#500#000


Liabiities ["00#000 6 "100#000] " 500#000

Capita stoc4# "10 par ["1#000#000 6 "250#000] 1#250#000

Additiona paidin capita ["00#000 6 "1#250#000 "0#000]

1#'10#000

?etained earnings ,subtract "'0#000 direct costs- 10#000

ota iabiities and stoc4hoders9 e!uity "*#500#000



8/11


Solution P1-3 ,continued-

Par i!!ue! 1*+000 !hare! o" !tock "or Sin&! out!tandin# !hare!

2a In%estment in 8in ,15#000 shares × "'0- 700#000

Capita stoc4# "10 par 150#000

Additiona paidin capita 50#000o record issuance o$ 15#000# "10 par common shares /ith a mar4et

price o$ "'0 per share&

In%estment epense '0#000

Additiona paidin capita 0#000

Cash 100#000

o record costs o$ combination in the ac!uisition o$ 8in&

Cash 20#000

In%entories 120#000

ther current assets 200#000

Land 200#000

Pant and e!uipment 8 net 00#000

Liabiities 100#000

In%estment in 8in 700#000.ain on bargain purchase 20#000

o record 8in9s net assets at $air %aues and the gain on the

bargain purchase&

)air %aue o$ net assets ac!uired "1#10#000

In%estment cost ,)air %aue o$ consideration- 700#000

.ain on >argain Purchase " 20#000

2! Pa" Co"#o"ation

>aance 8heet

:anuary 2# 2011


A!!et!

Cash ["20#000 6 "20#000 "100#000] " 1'0#000

In%entories ["100#000 6 "120#000] 220#000

ther current assets ["200#000 6 "200#000] 00#000

Land ["1'0#000 6 "200#000] *'0#000

Pant and e!uipment 8 net ["1#*00#000 6 "00#000] 2#000#000

ota assets "*#10#000

%iabilitie! and !tockholder!& e(uit$

Liabiities ["00#000 6 "100#000] " 500#000

Capita stoc4# "10 par ["1#000#000 6 "150#000] 1#150#000

Additiona paidin capita ["00#000 6 "50#000

"0#000]

1#110#000

?etained earnings ,subtract "'0#000 direct costs

and add "20#000 .ain $rom bargain purchase-

*+0#000

ota iabiities and stoc4hoders9 e!uity "*#10#000



9/11

Chapter 1 1-9

Solution P1-4

1 Schedule to allocate in,e!tment co!t to a!!et! and liabilitie!

In%estment cost ,$air %aue-# :anuary 1 "*00#000

)air %aue ac!uired $rom 8un ,"*'0#000 × 100D- *'0#000

Ecess $air %aue o%er cost ,bargain purchase gain- " '0#000

Aocation(

Aocation

Cash " 10#000

?ecei%abes 8 net 20#000

In%entories *0#000

Land 100#000

>uidings 8 net 150#000

E!uipment 8 net 150#000

Accounts payabe ,*0#000-

ther iabiities ,0#000-

.ain on bargain purchase ,'0#000-otas " *00#000

2 Pu! Co"#o"ation

>aance 8heet

at :anuary 1# 2011

,a$ter combination-

A!!et! %iabilitie!

Cash " 25#000 Accounts payabe " 120#000

?ecei%abes 8 net '0#000 =ote payabe ,5 years- 200#000

In%entories 150#000 ther iabiities 10#000Land 15#000 Liabiities 70#000

>uidings 8 net *50#000

E!uipment 8 net **0#000 Stockholder!& '(uit$

Capita stoc4# "10 par *00#000

ther paidin capita 100#000

?etained earnings 10#000

8toc4hoders9 e!uity 50#000

ota assets "1#0'0#000 ota e!uities "1#0'0#000

?etained earnings re$ects the "'0#000 gain on the bargain purchase&



10/11


Solution P1-5

1 ournal entrie! to record the ac(ui!ition o" Saw Corporation

In%estment in 8a/ 5#000#000

Capita stoc4# "10 par 1#000#000

ther paidin capita *#000#000Cash 1#000#000

o record ac!uisition o$ 8a/ $or 100#000 shares o$ common stoc4

and "1#000#000 cash&

In%estment epense 200#000

ther paidin capita 100#000

Cash *00#000

o record payment o$ costs to register and issue the shares o$

stoc4 ,"100#000- and other costs o$ combination ,"200#000-&

Cash +0#000

Accounts recei%abe 20#000

=otes recei%abe '00#000

In%entories 1#000#000

ther current assets 00#000Land 00#000

>uidings 2#00#000

E!uipment 1#200#000

Accounts payabe '00#000

Fortgage payabe# 10D 1#200#000

In%estment in 8a/ 5#000#000

.ain on bargain purchase 00#000

o record the net assets o$ 8a/ at $air %aue and the gain on the

bargain purchase&

Gain on -ar#ain Purcha!e Calculation

Ac!uisition price "5#000#000

)air %aue o$ net assets ac!uired 5#00#000

.ain on bargain purchase " 00#000



11/11

Chapter 1 1-11

Solution P1-5 ,continued-

2 Pat Co"#o"ation

>aance 8heet

at :anuary 2# 2011


A!!et!

Current Assets

Cash " 5#1+0#000

Accounts recei%abe 8 net *#*20#000

=otes recei%abe 8 net *#'00#000

In%entories '#000#000

ther current assets 1#+00#000 "17#700#000

Pant Assets

Land " #00#000

>uidings 8 net 20#00#000

E!uipment 8 net 21#200#000 '#000#000

ota assets "'5#700#000


Liabiities

Accounts payabe " 2#'00#000

Fortgage payabe# 10D 11#200#000 "1*#+00#000

8toc4hoders9 E!uity

Capita stoc4# "10 par "21#000#000

ther paidin capita 1+#700#000

?etained earnings 12#200#000 52#100#000

ota iabiities and stoc4hoders9 e!uity "'5#700#000

8ubtract "200#000 direct combination costs and add "00#000 gain on bargain

purchase&


Ch01 Beams12ge SM

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