Advanced Accounting: Financial

1
Baker / Lembke / King
Advanced
Financial
Accounting Fourth Edition
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Any other use of these presentations without express written
permission of Irwin/McGraw-Hill is strictly prohibited.
© The McGraw-Hill Companies, Inc., 1999
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Task Force Clip Art included in

this electronic presentation is
used with the permission of
New Vision Technology of
Nepean Ontario, Canada

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Baker / Lembke / King
Corporate Expansion
and Accounting for
Business
Combinations
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A business combination occurs

when two or more companies
join under common control.
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Types of Business Combinations
AA Company
AA Company
BB Company
Statutory Merger
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AA Company
CC Company
BB Company
Statutory Consolidation
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AA Company AA Company
BB Company BB Company
Stock Acquisition
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Determining the Type of Business Combinations
AA Company Invests in BB Company
Acquires Net Acquires

Assets Stock
Acquired
Yes Company
Liquidated?
No
Record as Record as
Statutory Merger Statutory Merger
or Statutory or Statutory
Consolidation Consolidation
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Business Combination Alternatives
AA Company Invests in BB Company
Acquires Net Acquires

Assets Stock
Yes Qualify No Yes Qualify No

as Pooling? as Pooling?
Net Assets Net Assets Investment Investment

Recorded at Recorded at Recorded at Recorded at
Book Value Fair Value Book Value Fair Value
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Relationship Between FMV and Price Paid
Cost of Investment
$640,000 Excess of cost over
fair value of net
identifiable assets
$130,000
Fair value of net
identifiable assets
Total differential
$510,000
$340,000
Excess of fair value
over book value of
net identifiable
assets
Book value of net $210,000
identifiable assets
$300,000
Purchase Combination (Point’s Books) 12
Cash and Receivables book value 45,000

Inventory market value 75,000
Land market value 70,000
Building and Equipment market value 350,000
Patent market value 80,000
Goodwill 130,000
Current Liabilities book value 110,000
Common Stock book value 100,000
Additional Paid-In Capital market value 475,000
Deferred Merger Costs 40,000
Deferred Stock Issue Costs 25,000
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Negative Goodwill
Fair value of net
identifiable assets
$510,000 Excess of fair value
of net identifiable
assets over cost
$50,000
Cost of investment
Total differential
$460,000
$160,000
Excess of fair value
over book value of
net identifiable
assets
Book value of net $210,000
identifiable assets
$300,000
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Pooling of Interest
What is essential
for a combination to
be viewed as a
pooling of interest?
An exchange of
common stock.
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Disclosure Requirements
The name and a brief description of the acquired

company.
A statement that purchase treatment has been used.
Information on the total cost incurred in making the
purchase.
The portion of the year for which operating results
of the acquired company have been included.
A description of the plan for amortization of
goodwill and the amortization method.
Information on any contingent payments or
commitments and their accounting treatments.
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Pro Forma Financial Statements
As a minimum,
supplemental  Operating results as if the
information should be acquisition had been made at
provided to show…
the start of the period.
 When comparative financial
statements are presented,
operating results for the
preceding period as if the
acquisition had occurred at
the start of the period.
Pooling of Interest (Point’s Books) 17
On January 1, 19X1, in a statutory merger, Point Corporation

issued 10,000 shares of its $10 par common stock in exchange
for all the assets and liabilities of Sharp Company.
Cash and Receivables 45,000

Inventory Recorded at 65,000
Land book value 40,000
Buildings and Equipment 400,000
Accumulated Depreciation 150,000
Current Liabilities 100,000
Common Stock (Point Corporation) 100,000
Additional Paid-In Capital 50,000
Retained Earnings 150,000
Pooling of Interest (Sharp’s Books) 18
On January 1, 19X1, in a statutory merger, Point Corporation

issued 10,000 shares of its $10 par common stock in exchange
for all the assets and liabilities of Sharp Company.
Investment in Point Stock 300,000

Current Liabilities 100,000
Accumulated Depreciation 150,000
Cash and Receivables 45,000
Inventory 65,000
Land 40,000
Buildings and Equipment 400,000
Pooling of Interest (Sharp’s Books) 19
The distribution of Point Corporation shares and the

liquidation of Sharp are recorded on Sharp’s books.
Common Stock 100,000

Additional Paid-In Capital 50,000
Retained Earnings 150,000
Investment in Point Stock 300,000
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Chapter One
The
End

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Baker / Lembke / King

© The McGraw-Hill Companies, Inc., 1999

Task Force Clip Art included in

© The McGraw-Hill Companies, Inc., 1999

A business combination occurs

AA Company Invests in BB Company

Acquires Net Acquires

AA Company Invests in BB Company

Acquires Net Acquires

Yes Qualify No Yes Qualify No

Net Assets Net Assets Investment Investment

Cash and Receivables book value 45,000

The name and a brief description of the acquired

On January 1, 19X1, in a statutory merger, Point Corporation

Cash and Receivables 45,000

On January 1, 19X1, in a statutory merger, Point Corporation

Investment in Point Stock 300,000

The distribution of Point Corporation shares and the

Common Stock 100,000

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