A business combination occurs when one company acquires another or two companies merge. There are two types of business combinations: asset acquisitions and stock acquisitions. For asset acquisitions, the acquirer obtains 100% of the acquiree's assets and liabilities. For stock acquisitions, the acquirer obtains a controlling interest, usually 51-100%, of the acquiree's stock, making it a subsidiary. The accounting treatment depends on the percentage of ownership obtained.
A business combination occurs when one company acquires another or two companies merge. There are two types of business combinations: asset acquisitions and stock acquisitions. For asset acquisitions, the acquirer obtains 100% of the acquiree's assets and liabilities. For stock acquisitions, the acquirer obtains a controlling interest, usually 51-100%, of the acquiree's stock, making it a subsidiary. The accounting treatment depends on the percentage of ownership obtained.
A business combination occurs when one company acquires another or two companies merge. There are two types of business combinations: asset acquisitions and stock acquisitions. For asset acquisitions, the acquirer obtains 100% of the acquiree's assets and liabilities. For stock acquisitions, the acquirer obtains a controlling interest, usually 51-100%, of the acquiree's stock, making it a subsidiary. The accounting treatment depends on the percentage of ownership obtained.
A business combination occurs when one company acquires another or two companies merge. There are two types of business combinations: asset acquisitions and stock acquisitions. For asset acquisitions, the acquirer obtains 100% of the acquiree's assets and liabilities. For stock acquisitions, the acquirer obtains a controlling interest, usually 51-100%, of the acquiree's stock, making it a subsidiary. The accounting treatment depends on the percentage of ownership obtained.
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ACCOUNTING 7AN
BUSINESS COMBINATION A business combination occurs when one company acquires another or two or more companies merge into one. A business combination is a transaction or event in which an acquirer obtains control of one or more businesses.
Type of business combination as to acquisition
1. Asset Acquisition (100%) (Acquirer-Acquiree) a) Merger A + B = A or B b) Consolidation A+B=C 2. Stock Acquisition (51 % - 100) (Parent-Subsidiary) If the parent acquired the subsidiary 100%, that is fully-owned If the parent acquired less than 100%, the percent acquired will be the controlling interest and the remaining percent is the non-controlling interest.
1. Dividend Received If from the issuing corporation or the investee: The entry of the investor under the cost method Cash xxx Dividend Income xxx
The entry of the investor under the equity method
Cash xxx Investment in Associate xxx 2. Net Income/ Loss If the investee report net income The entry of the investor under the cost method No entry The entry of the investor under the equity method Investment in Associate xxx Investment Income xxx If the investee report net loss The entry of the investor under the cost method No entry The entry of the investor under the equity method Investment Loss xxx Investment in Associate xxx
Other types of Business Combination
1. Horizontal – similar businesses are acquired 2. Vertical – different levels in a marketing chain EX. Peanut kisses is owned before by Pukaris (HAHAHAHA) Manufacturing but acquired Peanut Kisses Vertical integration is when a business expands by acquiring another company that operates before or after them in the supply chain. 3. Conglomerate – dissimilar business
Accounting for business combination:
1. Identifying the acquirer (parent) 2. Determining the acquisition date (maggama ug FS) 3. Recognizing and measuring goodwill 4. Consideration transferred 5. Non-controlling interest in the acquiree 6. Previously held interest in the acquiree 7. Identifiable assets acquired and liabilities assumed
Forms of Consideration Given:
1) Cash 2) Non-Cash Assets 3) Shares 4) Debt Securities 5) Combination of the four above
Types of Acquisition Related Cost
1) Direct-Indirect Acquisition Cost Expense as incurred; will not be capitalized 2) Stock Related Cost/Stock Issuance Cost Will be deducted from additional pay-in capital if naa; will not be capitalized For the book of Acquirer during Acquisition, Fair Value is used for the amounts For the book of the Acquiree during the Closing of the Books, Book Value is used for the amounts SAMPLE PROBLEM #1 On January 1, 2021, Lettuce Co. acquired all the assets and assumed all the liabilities of Spinach Corp. by paying P1,380,000. Lettuce Co. paid acquisition related cost of the combination totaling P50,000 on that date. The balance sheet of Spinach and Lettuce at book value and fair market values are as follows: SPINACH LETTUCE Book Value Fair Value Book Value Fair Value Cash ₱ 150,000 ₱ 150,000 ₱ 2,500,000 ₱ 2,500,000 Inventory 420,000 500,000 500,000 400,000 Buildings and Equipment 600,000 750,000 9,700,000 10,500,000 Patents 150,000 150,000 500,000 400,000 Total Assets ₱1,320,000 ₱ 1,550,000 ₱ 13,200,000 ₱ 13,800,000
Ordinary Shares 600,000 2,500,000 Share Premium 200,000 7,000,000 Retained Earnings 270,000 2,900,000 Total Liabilities and ₱1,320,000 ₱ 13,200,000 Equities
1. Prepare the following immediately after the acquisition:
a. Journal entry on Lettuce Co.’s books to record the acquisition of Spinach Corp. b. Close the books of Spinach Corp. c. Balance Sheet of Lettuce Co. 2. Prepare the following immediately after the acquisition assuming that Lettuce purchased 100% interest of Spinach Corp. a. Journal entry on Lettuce Co.’s books to record the acquisition of Spinach Corp. b. Elimination Entry c. Consolidated Balance Sheet immediately after the business combination. SOLUTION AND ANSWER: REQUIREMENT 1 a) Book of Lettuce Co. Cash 150,000.00 Inventory 500,000.00 Buildings and Equipment 750,000.00 Patents 150,000.00 Goodwill * 80,000.00 Accounts Payable 250,000.00 Cash 1,380,000.00
* Supporting Computation for the Goodwill
Consideration Given 1,380,000.00 FV of Net Identifiable Assets (1,550,000.00 – 250,000.00) 1,300,000.00 Goodwill 80,000.00
Retained Earnings 50,000.00
Cash 50,000.00 b) Book of Spinach Cash 1,380,000.00 Accounts Payable 250,000.00 Cash 150,000.00 Inventory 420,000.00 Buildings and Equipment 600,000.00 Patents 150,000.00 Gain on Sale 310,000.00
Ordinary Shares 600,000.00
Share Premium 200,000.00 Retained Earnings 270,000.00 Gain on Sale 310,000.00 Cash 1,380,000.00
c) WORKING PAPER ACCOUNTS LETTUCE (BV) SPINACH (FV) COMBINED Cash ₱ 2,500,000.00 ₱ 150,000.00 ₱ 1,220,000.00 * Inventory 500,000.00 500,000.00 1,000,000.00 Building & Equipment 9,700,000.00 750,000.00 10,450,000.00 Patents 500,000.00 150,000.00 650,000.00 Goodwill 80,000.00 TOTAL ₱ 13,200,000.00 ₱ 1,550,000.00 ₱ 13,400,000.00
SUPPORTING COMPUTATION *Cash (Lettuce Co.) ₱ 2,500,000 ** Retained Earnings ₱ 2,900,000 Cash (Spinach Corp.) 150,000 Acquisition Related Cost 50,000 Total Cash ₱ 2,650,000 TOTAL RETAINED EARNINGS ₱ 2,850,000 Less: Consideration Given ₱ 1,380,000 Acquisition Related Cost 50,000 1,430,000 COMBINED CASH ₱ 1,220,000
LETTUCE COMPANCY COMBINED STATEMENT OF FINANCIAL POSITION JANUARY 1, 2020 ASSET LIABILITIES AND EQUITY Cash ₱ 1,220,000.00 Accounts Payable ₱ 1,050,000.00 Inventory 1,000,000.00 Ordinary Share 2,500,000.00 Buildings & Equipment 10,450,000.00 Share Premium 7,000,000.00 Patents 650,000.00 Retained Earnings 2,850,000.00 Goodwill 80,000.00
TOTAL LIABILITIES TOTAL ASSETS ₱ 13,400,000.00 ₱ 13,400,000.00 AND EQUITY REQUIREMENT NO. 2 a) Book of Lettuce Co. Investment in Spinach Corp 1,380,000.00 Cash 1,380,000.00
Retained Earnings 50,000.00
Cash 50,000.00
b) Elimination Entry (Neither the Parent or Subsidiary; it is to be recorded in a separate book) (ang irecord ky ang increase of the fair value over the book value) ELIMINATION ENTRY ACCOUNTS LETTUCE (BV) SPINACH (BV) DR. CR. CONSOLIDATED BS Cash * ₱ 1,070,000 ₱ 150,000 ₱ 1,220,000 Investment in Spinach 1,380,000 ₱ 1,380,000 - Inventory 500,000 420,000 ₱ 80,000 1,000,000 Buildings & Equipment 9,700,000 600,000 150,000 10,450,000 Patents 500,000 150,00 650,000 Goodwill 80,000 80,000 TOTAL ₱ 13,150,000 ₱ 1,320,000 ₱ 13,400,000
Inventory 80,000.00 Building and Equipment 150,000.00 Goodwill 80,000.00 Ordinary Share 600,000.00 Share Premium 200,000.00 Retained Earnings 270,000.00 Investment in Spinach Corp 1,380,000.00
c) LETTUCE COMPANCY CONSOLIDATED STATEMENT OF FINANCIAL POSITION JANUARY 1, 2020
ASSET LIABILITIES AND EQUITY
Cash ₱ 1,220,000.00 Accounts Payable ₱ 1,050,000.00 Inventory 1,000,000.00 Ordinary Share 2,500,000.00 Buildings & Equipment 10,450,000.00 Share Premium 7,000,000.00 Patents 650,000.00 Retained Earnings 2,850,000.00 Goodwill 80,000.00 TOTAL LIABILITIES TOTAL ASSETS ₱ 13,400,000.00 ₱ 13,400,000.00 AND EQUITY COMPLETE GUIDE IN SOLVING NET ASSET ACQUISITION PROBLEM (COMBINED BALANCE SHEET)
COMBINED ASSET + ACQUIRER (Book Value) + ACQUIRER (Fair Value) + GOODWILL (Consideration Given - FV of Net Identifiable Assets) - CASH PAID/ASSET GIVEN (Consideration Given & Acquisition Related Cost)
COMINED LIABILITIES + ACQUIRER (Book Value) + ACQUIRER (Fair Value) + CONTINGENT LIABILITIES (not all the times); (these are liabilities that are incurred in the future) - DEBT SECURITY ISSUED (only if consideration given is debt security)
ORDINARY SHARES + ACQUIRER + SHARES ISSUED AT PAR (only if the consideration given is shares)
SHARE PREMIUM + ACQUIRER + SHARES ISSUED ABOVE PAR - COST TO REGISTER SHARES
HOMEWORK 1 PACMAN Corporation and RIOS Company have announced terms of an exchange agreement under which PACMAN will issue 8,000 shares of its P40 par value common stock to acquire all the assets of RIOS Company. PACMAN shares currently are trading at P50, and RIOS P5 par value shares are trading at P18 each. In addition, PACMAN Corporation incurred P50,000 for finder’s fee and P40,000 for stock issuance cost. Book value and fair value balance sheet data on January 1, 2021, are as follows:
PACMAN CORPORATION RIOS COMPANY
BALANCE SHEET ITEM Book Value Fair Value Book Value Fair Value Cash ₱ 150,000 ₱ 150,000 ₱ 40,000 ₱ 40,000 Inventory 80,000 100,000 50,000 80,000 Investment 120,000 150,000 80,000 100,000 Land 100,000 170,000 50,000 85,000 Buildings and Equipment 300,000 400,000 160,000 230,000 Accumulated Depreciation (80,000) (50,000) TOTAL ASSETS ₱ 670,000 ₱ 970,000 ₱ 330,000 ₱ 535,000
Common Stock 200,000 100,000 APIC 20,000 10,000 Retained Earnings 300,000 130,000 TOTAL LIABILITIES AND ₱ 670,000 ₱ 330,000 EQUITY Required: a. Journal entries on the books of PACMAN Corporation to record the acquisition. b. Journal entries to dissolve RIOS Company. c. What will be the amount reported immediately following the business combination for each of the following items in the combined company’s balance sheet. 1. Assets 2. Additional Paid-in-Capital 3. Retained earnings 4. Stockholders’ Equity
SOLUTIONS AND ANSWERS:
REQUIREMENT 1: a) Book of PACMAN Corp Cash 40,000.00 Inventory 80,000.00 Investment 100,000.00 Land 85,000.00 Building and Equipment 230,000.00 Accounts Payable 100,000.00 Goodwill * 35,000.00 Common Stock 400,000.00
* Supporting Computation for the Goodwill
Consideration Given ₱ 400,000.00 FV of Net Identifiable Assets (535,000.00 – 100,000.00) 435,000.00 Goodwill (₱ 35,000.00)
