1. 1 © The McGraw-Hill Companies, Inc., 1999 Advanced Financial Accounting Fourth Edition Baker / Lembke / King These electronic slides are intended for the exclusive use by adopters of Irwin/McGraw-Hill accounting textbooks only. Any other use of these presentations without express written permission of Irwin/McGraw-Hill is strictly prohibited.

2. 2 © The McGraw-Hill Companies, Inc., 1999 This electronic presentation prepared by Douglas Cloud, Pepperdine University

3. 3 Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada © The McGraw-Hill Companies, Inc., 1999

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

5. 5 A business combination occurs when two or more companies join under common control. A business combination occurs when two or more companies join under common control.

6. 6 Types of Business Combinations AA Company BB Company AA Company Statutory Merger

7. 7 Types of Business Combinations AA Company BB Company Statutory Consolidation CC Company

8. 8 Types of Business Combinations AA Company BB Company Stock Acquisition AA Company BB Company

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

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

11. 11 Relationship Between FMV and Price Paid Cost of Investment $640,000 Fair value of net identifiable assets $510,000 Total differential $340,000 Excess of cost over fair value of net identifiable assets $130,000 Excess of fair value over book value of net identifiable assets $210,000 Book value of net identifiable assets $300,000

12. 12 Purchase Combination (Point’s Books) Cash and Receivables45,000 Inventory75,000 Land70,000 Building and Equipment350,000 Patent80,000 Current Liabilities110,000 Common Stock100,000 Additional Paid-In Capital475,000 Deferred Merger Costs40,000 Deferred Stock Issue Costs25,000 book valuemarket value book value market value Goodwill 130,000

13. 13 Cost of investment $460,000 Fair value of net identifiable assets $510,000 Total differential $160,000 Excess of fair value of net identifiable assets over cost $50,000 Excess of fair value over book value of net identifiable assets $210,000 Book value of net identifiable assets $300,000 Negative Goodwill

14. 14 Pooling of Interest What is essential for a combination to be viewed as a pooling of interest? What is essential for a combination to be viewed as a pooling of interest? An exchange of common stock. An exchange of common stock.

15. 15  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.  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. Disclosure Requirements

16. 16 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 the period. 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 the period. Pro Forma Financial Statements As a minimum, supplemental information should be provided to show… As a minimum, supplemental information should be provided to show…

17. 17 Pooling of Interest (Point’s Books) 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. 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 Receivables45,000 Inventory65,000 Land40,000 Buildings and Equipment400,000 Accumulated Depreciation150,000 Current Liabilities100,000 Common Stock (Point Corporation)100,000 Additional Paid-In Capital50,000 Retained Earnings150,000 Recorded at book value

18. 18 Pooling of Interest (Sharp’s Books) 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. 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 Stock300,000 Current Liabilities100,000 Accumulated Depreciation150,000 Cash and Receivables45,000 Inventory65,000 Land40,000 Buildings and Equipment400,000

19. 19 Pooling of Interest (Sharp’s Books) The distribution of Point Corporation shares and the liquidation of Sharp are recorded on Sharp’s books. The distribution of Point Corporation shares and the liquidation of Sharp are recorded on Sharp’s books. Common Stock100,000 Additional Paid-In Capital50,000 Retained Earnings150,000 Investment in Point Stock300,000

20. 20 Chapter OneThe End EndThe