1. Advanced Financial Accounting
Baker / Lembke / King
Advanced Financial Accounting
Fifth Edition

2. This electronic presentation prepared by Douglas Cloud, D. B. A, C. P
This electronic presentation prepared by Douglas Cloud, D.B.A, C.P.A., Professor of Accounting at Pepperdine University

3. Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada

4. 1 Corporate Expansion and Accounting for Business Combination
Baker / Lembke / King
Corporate Expansion and Accounting for Business Combination 1

5. Control relates to the ability to direct policies and management.
A business combination occurs when two or more companies join under common control.

6. Types of Business Combination
(a) Statutory Merger
AA Company
BB Company
AA Company
Only one of the combining companies survives and the other loses its separate identify.

7. (b) Statutory Consolidation
Types of Business Combination
(b) Statutory Consolidation
AA Company
BB Company
CC Company
Both the combining companies are dissolved and the assets and liabilities of both companies are transferred to a newly created corporation.

8. Types of Business Combination
(c) Stock Acquisition
AA Company
AA Company
BB Company
BB Company
One company acquires the voting shares of another company and the two companies continue to operate separately.

9. AA Company Invests in BB Company
Determining the Type of Business Combination
AA Company Invests in BB Company
Acquires Net
Assets
Acquires
Stock
Record as
Statutory Merger
or Statutory
Consolidation
Acquired
Company
Liquidated?
Yes
Record as
Stock Acquisition and Operate as Subsidiary. No

10. AA Company Invests in BB Company
Traditional Business Combination Alternatives
AA Company Invests in BB Company
Acquired Net
Assets
Acquired
Stock
Qualify
as Pooling?
Qualify
as Pooling?
Net Assets
Recorded at
Book Value
Yes
Net Assets
Recorded at
Fair Value No
Investment
Recorded at
Book Value
Yes
Investment
Recorded at
Fair Value No

11. Point Corporation Illustration
On January 1, 20X1, Point Corporation purchases all the assets and liabilities of Sharp Company in a statutory merger by issuing to Sharp 10,000 shares of $10 par value common stock. The shares issued have a total market value of $600,000. Point incurs legal and appraisal fees of $40,000 (for a total purchase price of $640,000) in connection with the combination and stock issue costs of $25,000.
Fair value of stock issued $600,000
Stock issue costs -25,000
Recorded amount of stock $575,000

12. Point Corporation Illustration
Assets, Liabilities, and Equities Book Value Fair Value
Cash and Receivables $ 45,000 $ 45,000
Inventory 65, ,000
Land 40, ,000
Buildings and Equipment 400, ,000
Accumulated Depreciation (150,000
Patent ,000
Total Assets $400,000 $620,000
Current Liabilities $100,000 $110,000
Common Stock ($5 par) 100,000
Additional Paid-In Capital 50,000
Retained Earnings 150,000
Total Liabilities and Equities $400,000
Fair value of Net Assets $510,000 )

13. Point Corporation Illustration
Cost of Investment
$640,000
Total differential
$340,000
Excess of cost over fair value of net identifiable assets
$130,000
Fair value of net identifiable assets $510,000
Excess of fair value over book value of net identifiable assets
$210,000
Book value of net identifiable assets $300,000

14. Point Corporation Illustration
The $40,000 of other acquisition costs associated with the combination and the $25,000 of stock issue costs may be recorded in separate temporary “suspense” accounts as incurred:
Deferred Merger Costs 40,000
Cash 40,000
Record costs related to purchase of
Sharp Company.
Deferred Stock Issue Costs 25,000
Cash 25,000
Record costs related to issuance of
common stock.

15. Point Corporation Illustration
fair value
Cash and Receivables 45,000
Inventory 75,000
Land 70,000
Buildings and Equipment 350,000
Patent 80,000
Current Liabilities 110,000
Common Stock 100,000
Additional Paid-In Capital 475,000
Deferred Merger Costs 40,000
Deferred Stock Issue Costs 25,000
Record purchase of Sharp Company.
fair value
fair value
fair value
fair value
Goodwill ,000
fair value
book value
fair value

16. Entries Recorded by Acquired Company
The fair value of Point Corporation shares is recognized by Sharp at the time of the exchange, and a gain of $300,000 is recorded.
Investment in Point Stock 600,000
Current Liabilities 100,000
Accumulated Depreciation 150,000
Cash and Receivables 45,000
Inventory 65,000
Land 40,000
Building and Equipment 400,000
Gain on Sale of Net Assets 300,000
Record transfer of assets to Point
Corporation.

17. The distribution of Point Corporation stock is recorded.
Entries Recorded by Acquired Company
The distribution of Point Corporation stock is recorded.
Common Stock 100,000
Additional Paid-In Capital 50,000
Retained Earnings 150,000
Gain on Sale of Net Assets 300,000
Investment in Point Stock 600,000
Record distribution of Point
Corporation stock.

18. Recording Goodwill
Because expenditures for “self-developed” goodwill often are not distinguishable from current operating costs, such expenditures are required to be expensed as incurred.

19. Recording Goodwill
However, when goodwill is purchased in connection with a business combination, the amount is viewed as objectively determinable and is capitalized.

20. Recording Goodwill
In a purchase-type business combination, the cost of goodwill purchased is measured as the excess of the total purchase price over the fair value of the net identifiable assets acquired.

21. Negative Goodwill Fair value of net identifiable assets $510,000
Excess of fair value over book value of net identifiable assets
$210,000
Excess of fair value of net identifiable assets over cost
$50,000
Cost of investment
$460,000
Total differential
$160,000
Book value of net identifiable assets $300,000

22. Combination Effected through Purchase of Stock
Point Corporation exchanges 10,000 shares of its stock with a total market value of $600,000 for all the shares of Sharp Company in a purchase transaction and incurs and records merger costs of $40,000 and stock issue costs of $25,000.
Investment in Sharp Stock 640,000
Common Stock 100,000
Additional Paid-In Capital 475,000
Deferred Merger Costs 40,000
Deferred Stock Issue Costs 25,000
Record purchase of Sharp Company
Stock.

23. Disclosure Requirements
1. The name and a brief description of the acquired company.
2. A statement that purchase treatment has been used.
3. Information on the total cost incurred in making the purchase.
4. The portion of the year for which operating results of the acquired company have been included.
5. Information on any contingent payments or commitments and their accounting treatment.

24. Pro Forma Financial Statements
As a minimum,
supplemental
information should be
provided to show…
Operating results as if the acquisition had been made at 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 that period.

25. Pooling of Interest
The FASB has decided to eliminate pooling of interest as an acceptable method for accounting for business combinations.
However, an examination of this method is warranted because the effects of past poolings will affect financial statements for many years in the future.

26. Pooling of Interest (Point’s Books)
On January 1, 20X1, in a statutory merger accounted for as a pooling of interests, 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 65,000
Land 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
Record pooling-type merger with Sharp.
Recorded at
book value

27. Pooling of Interest (Sharp’s Books)
On January 1, 20X1, in a statutory merger accounted for as a pooling of interests, 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
Record transfer of assets to Point Corporation.

28. Pooling of Interest (Sharp’s Books)
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, Record distribution of Point Corporation stock.

29. Combined Stockholders’ Equity
Differences in Total Par Value
Combined Stockholders’ Equity
Capital stock
$400,000
Additional paid-in capital
The like stockholders’ equity accounts of the combining companies are summed without adjustment when the total par values of the shares exchanged are equal.
$80,000
Retained earnings
$370,000
Case 1

30. Differences in Total Par Value
Net Assets of Sharp Company 300,000
Common Stock 100,000
Additional Paid-In Capital 50,000
Retained Earnings 150,000
Case 1

31. Combined Stockholders’ Equity
Differences in Total Par Value
Combined Stockholders’ Equity
Capital stock
$380,000
Additional paid-in capital
When the total par value of the shares issued is less than the par value of the shares replaced, the difference is reflected as an increase in additional paid-in capital.
$100,000
Retained earnings
$370,000
Case 2

32. Differences in Total Par Value
Net Assets of Sharp Company 300,000
Common Stock 80,000
Additional Paid-In Capital 70,000
Retained Earnings 150,000
Case 2

33. Combined Stockholders’ Equity
Differences in Total Par Value
Combined Stockholders’ Equity
Capital stock
$440,000
Additional paid-in capital
When the total par value of the shares issued is greater than the par value of the shares acquired, the difference is reflected as a reduction in additional paid-in capital.
$40,000
Retained earnings
$370,000
Case 3

34. Differences in Total Par Value
Net Assets of Sharp Company 300,000
Common Stock 140,000
Additional Paid-In Capital 10,000
Retained Earnings 150,000
Case 3

35. Combined Stockholders’ Equity
Differences in Total Par Value
Combined Stockholders’ Equity
Capital stock
$510,000
Retained earnings
$340,000
Case 4

36. Combined Stockholders’ Equity
Differences in Total Par Value
Combined Stockholders’ Equity
Par value of Point’s shares issued $210,000
Par value of Sharp’s shares replaced (100,000
Increase in total par value $110,000
Additional paid-in capital of Sharp (50,000
Additional paid-in capital of Point (30,000
Reduction in combined retained earnings $ 30,000 )
When Point issues 21,000 shares, the $210,000 par value of the shares issued exceeds the $100,000 par value of Sharp’s shares retired by enough to eliminate the combined additional paid-in capital and part of the combined retained earnings.
Capital stock
$510,000
Retained earnings
$340,000
Case 4

37. Differences in Total Par Value
Net Assets of Sharp Company 300,000
Additional Paid-In Capital 30,000
Common Stock 210,000
Retained Earnings 120,000
Case 4

38. Disclosure Requirements--Pooling
1. The name and a brief description of the acquired company.
2. A statement that pooling treatment has been used.
3. Description and number of shares issued in the exchange.
4. For the separate companies, revenue, extraordinary items, net income, changes in stockholders’ equity, and the amount and handling of intercompany transactions for the portion of the current period before the date of the combination.
More

39. Disclosure Requirements--Pooling
5. A description of any adjustments of net assets or income related to changes in accounting procedures.
6. A description of the impact of a change in the fiscal period of a combining company.
7. A reconciliation of revenue and income previously reported by the stock-issuing company with the restated amounts reported for those periods for the combined company.

40. Pooling - criteria Attributes of combining company Autonomous
Independent
Manner of combining
single transaction or completed in one year
Issue only common stock with right identical
None of combining companies changes the equity within two year before the plan
Combining company reacquire share only for purposes other than business combination
The ratio of interest on individual stock holder remains the same
The voting rights are exercisable
The combination is resolved at the date the plan consummated
Absence of planned transaction
Does not agree to retire reacquire all or part common stock issue
Does not enter into other financial for the benefit of the former
Does not intend to dispose of significant part of asset combining

41. Penggabungan Usaha PSAK
Penggabungan secara umum dilakukan dengan metode purchase kecuali penggabungan yang memenuhi kriteria pooling of interest

42. KUIS
PT. Intan membeli 100% kepemilikan PT. Mutiara, dengan menerbitkan lembar saham dengan nilai par 20 dan nilai pasar 35. Setelah penggabungan tersebut PT. Mutiara dibubarkan. Biaya penggabungan biaya konsultan dan biaya penerbitan saham. Saldo additional paid in capital PT. Intan
Cash and Receivables $ 40,000 $ 40,000
Inventory 60, ,000
Land 100, ,000
Buildings and Equipment (net) 400, ,000
Total Assets $600,000 $900,000
Current Liabilities $100,000 $120,000
Common Stock ($10 par) 200,000
Additional Paid-In Capital 150,000
Retained Earnings 150,000
Total Liabilities and Equities $600,000
Buat jurnal penggabungan dengan metode purchase & pooling
Jika PT. Mutiara tidak dibubarkan tetapi masih berdiri bagaimana jurnal PT. Intan (purchase method)

43. Chapter One
The End