CHAPTER 2

CONSOLIDATION OF FINANCIAL INFORMATION

Major changes occurred for financial reporting for business combinations beginning in 2009.
These changes are documented in FASB ASC Topic 0!" #Business Combinations$ and Topic
%0" #Consolidation.$ These standards re&uire the ac&uisition method 'hich emphasi(es
ac&uisition)date fair *alues for recording all combinations.
+n this chapter" 'e first pro*ide co*erage of e,pansion through corporate ta-eo*ers and an
o*er*ie' of the consolidation process. Then 'e present the ac&uisition method of accounting
for business combinations follo'ed b. limited co*erage of the purchase method and pooling of
interests pro*ided in the Appendi, to this chapter.
Chapter Outline
+. Business combinations and the consolidation process
A. A business combination is the formation of a single economic entit." an e*ent that
occurs 'hene*er one compan. gains control o*er another
B. Business combinations can be created in se*eral different 'a.s
%. Statutor. merger/onl. one of the original companies remains in business as a
legall. incorporated enterprise.
a. Assets and liabilities can be ac&uired 'ith the seller then dissol*ing itself as a
corporation.
b. All of the capital stoc- of a compan. can be ac&uired 'ith the assets and
liabilities then transferred to the bu.er follo'ed b. the seller0s dissolution.
2. Statutor. consolidation/assets or capital stoc- of t'o or more companies are
transferred to a ne'l. formed corporation
1. Ac&uisition b. one compan. of a controlling interest in the *oting stoc- of a
second. 2issolution does not ta-e place3 both parties retain their separate legal
incorporation.
C. Financial information from the members of a business combination must be
consolidated into a single set of financial statements representing the entire
economic entit..
%. +f the ac&uired compan. is legall. dissol*ed" a permanent consolidation is
produced on the date of ac&uisition b. entering all account balances into the
financial records of the sur*i*ing compan..
2. +f separate incorporation is maintained" consolidation is periodicall. simulated
'hene*er financial statements are to be prepared. This process is carried out
through the use of 'or-sheets and consolidation entries. Consolidation
'or-sheet entries are used to adjust and eliminate subsidiar. compan.
accounts. 4ntr. #S$ eliminates the e&uit. accounts of the subsidiar.. 4ntr. #A$
allocates e,ess pa.ment amounts to identifiable assets and liabilities based on
the fair *alue of the subsidiar. accounts. 5Consolidation journal entries are ne*er
recorded in the boo-s of either compan." the. are 'or-sheet entries onl..6
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2013 by McGraw-Hill Education. This is proprietary material solely or authori!ed instructor use. "ot authori!ed or sale or distribution in any
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++. The Ac&uisition Method
A. The ac&uisition method replaced the purchase method. For combinations resulting
in complete o'nership" it is distinguished b. four characteristics.
%. All assets ac&uired and liabilities assumed in the combination are recogni(ed
and measured at their indi*idual fair *alues 5'ith fe' e,ceptions6.
2. The fair *alue of the consideration transferred pro*ides a starting point for
*aluing and recording a business combination.
a. The consideration transferred includes cash" securities" and contingent
performance obligations.
b. 2irect combination costs are e,pensed as incurred.
c. Stoc- issuance costs are recorded as a reduction in paid)in capital.
d. The fair *alue of an. noncontrolling interest also adds to the *aluation of the
ac&uired firm and is co*ered beginning in Chapter 7 of the te,t.
1. An. e,cess of the fair *alue of the consideration transferred o*er the net amount
assigned to the indi*idual assets ac&uired and liabilities assumed is recogni(ed
b. the ac&uirer as good'ill.
7. An. e,cess of the net amount assigned to the indi*idual assets ac&uired and
liabilities assumed o*er the fair *alue of the consideration transferred is
recogni(ed b. the ac&uirer as a #gain on bargain purchase.$
B. +n)process research and de*elopment ac&uired in a business combination is
recogni(ed as an asset at its ac&uisition)date fair *alue.
+++. Con*ergence bet'een 8.S. 9AA: and +AS
A. +F;S 1 < nearl. identical to 8.S. 9AA: because of joint efforts
B. +F;S %0 < Consolidated Finanical Statements and +F;S %2 < 2isclosure of +nterests
in =ther 4ntities both become effecti*e in 20%1. Some differences bet'een these
and 9AA:
APPENDIX:
The Purchase Meth!
A. The purchase method 'as applicable for business combinations occurring for fiscal
.ears beginning prior to 2ecember %!" 200. +t 'as distinguished b. three
characteristics.
%. =ne compan. 'as clearl. in a dominant role as the purchasing part.
2. A bargained e,change transaction too- place to obtain control o*er the second
compan..
1. A historical cost figure 'as determined based on the ac&uisition price paid.
a. The cost of the ac&uisition included an. direct combination costs.
b. Stoc- issuance costs 'ere recorded as a reduction in paid)in capital and are
not considered to be a component of the ac&uisition price.
B. :urchase method procedures
%. The assets and liabilities ac&uired 'ere measured b. the bu.er at fair *alue as of
the date of ac&uisition.
2. An. portion of the pa.ment made in e,cess of the fair *alue of these assets and
liabilities 'as attributed to an intangible asset commonl. referred to as good'ill.
1. +f the price paid 'as belo' the fair *alue of the assets and liabilities" the
accounts of the ac&uired compan. 'ere still measured at fair *alue e,cept that
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the *alues of certain noncurrent assets 'ere reduced in total b. the e,cess cost.
+f these *alues 'ere not great enough to absorb the entire reduction" an
e,traordinar. gain 'as recogni(ed.
The Plin" # Interest Meth! 5prohibited for combinations after June 20026
A. A pooling of interests 'as formed b. the uniting of the o'nership interests of t'o
companies through the e,change of e&uit. securities. The characteristics of a
pooling are fundamentall. different from either the purchase or ac&uisition methods.
%. >either part. 'as trul. *ie'ed as an ac&uiring compan..
2. :recise cost figures stemming from the e,change of securities 'ere difficult to
ascertain.
1. The transaction affected the stoc-holders rather than the companies.
B. :ooling of interests accounting
%. Because of the nature of a pooling" determination of an ac&uisition price 'as not
rele*ant.
a. Since no ac&uisition price 'as computed" all direct costs of creating the
combination 'ere e,pensed immediatel..
b. +n addition" ne' good'ill arising from the combination 'as ne*er recogni(ed
in a pooling of interests. Similarl." no *aluation adjustments 'ere recorded for
an. of the assets or liabilities combined.
2. The boo- *alues of the t'o companies 'ere simpl. brought together to produce
a set of consolidated financial records. A pooling 'as *ie'ed as affecting the
o'ners rather than the t'o companies.
1. The results of operations reported b. both parties 'ere combined on a
retroacti*e basis as if the companies had al'a.s been together.
7. Contro*ers. historicall. surrounded the pooling of interests method.
a. An. cost figures indicated b. the e,change transaction that created the
combination 'ere ignored.
b. +ncome balances pre*iousl. reported 'ere altered since operations 'ere
combined on a retroacti*e basis.
c. ;eported net income 'as usuall. higher in subse&uent .ears than in a
purchase since no good'ill or *aluation adjustments 'ere recogni(ed 'hich
re&uire amorti(ation.
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Ans$ers t %uestins
%. A business combination is the process of forming a single economic entit. b. the uniting
of t'o or more organi(ations under common o'nership. The term also refers to the
entit. that results from this process.
2. 5%6 A statutor. merger is created 'hene*er t'o or more companies come together to
form a business combination and onl. one remains in e,istence as an identifiable entit..
This arrangement is often instituted b. the ac&uisition of substantiall. all of an
enterprise0s assets. 526 A statutor. merger can also be produced b. the ac&uisition of a
compan.0s capital stoc-. This transaction is labeled a statutor. merger if the ac&uired
compan. transfers its assets and liabilities to the bu.er and then legall. dissol*es as a
corporation. 516 A statutor. consolidation results 'hen t'o or more companies transfer
all of their assets or capital stoc- to a ne'l. formed corporation. The original companies
are being #consolidated$ into the ne' entit.. 576 A business combination is also formed
'hene*er one compan. gains control o*er another through the ac&uisition of
outstanding *oting stoc-. Both companies retain their separate legal identities although
the common o'nership indicates that onl. a single economic entit. e,ists.
1. Consolidated financial statements represent accounting information gathered from t'o
or more separate companies. This data" although accumulated indi*iduall. b. the
organi(ations" is brought together 5or consolidated6 to describe the single economic
entit. created b. the business combination.
7. Companies that form a business combination 'ill often retain their separate legal
identities as 'ell as their indi*idual accounting s.stems. +n such cases" internal financial
data continues to be accumulated b. each organi(ation. Separate financial reports ma.
be re&uired for outside shareholders 5a noncontrolling interest6" the go*ernment" debt
holders" etc. This information ma. also be utili(ed in corporate e*aluations and other
decision ma-ing. ?o'e*er" the business combination must periodicall. produce
consolidated financial statements encompassing all of the companies 'ithin the single
economic entit.. The purpose of a 'or-sheet is to organi(e and structure this process.
The 'or-sheet allo's for a simulated consolidation to be carried out on a regular"
periodic basis 'ithout affecting the financial records of the *arious component
companies.
!. Se*eral situations can occur in 'hich the fair *alue of the !0"000 shares being issued
might be difficult to ascertain. These e,amples include@
The shares ma. be ne'l. issued 5if Aones has just been created6 so that no
accurate *alue has .et been established3
Aones ma. be a closel. held corporation so that no fair *alue is a*ailable for its
shares3
The number of ne'l. issued shares 5especiall. if the amount is large in comparison
to the &uantit. of pre*iousl. outstanding shares6 ma. cause the price of the stoc- to
fluctuate 'idel. so that no accurate fair *alue can be determined during a
reasonable period of time3
Aones0 stoc- ma. ha*e historicall. e,perienced drastic s'ings in price. Thus" a
&uoted figure at an. specific point in time ma. not be an ade&uate or representati*e
*alue for long)term accounting purposes.
B. For combinations resulting in complete o'nership" the ac&uisition method allocates the
fair *alue of the consideration transferred to the separatel. recogni(ed assets ac&uired
and liabilities assumed based on their indi*idual fair *alues.
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C. The re*enues and e,penses 5both current and past6 of the parent are included 'ithin
reported figures. ?o'e*er" the re*enues and e,penses of the subsidiar. are
consolidated from the date of the ac&uisition for'ard 'ithin the 'or-sheet consolidation
process. The operations of the subsidiar. are onl. applicable to the business
combination if earned subse&uent to its creation.
. Morgan0s additional ac&uisition *alue ma. be attributed to man. factors@ e,pected
s.nergies bet'een Morgan0s and Aennings0 assets" fa*orable earnings projections"
competiti*e bidding to ac&uire Aennings" etc. +n general ho'e*er" an. amount paid b.
the parent compan. in e,cess of the fair *alues of the subsidiar.0s net assets ac&uired is
reported as good'ill.
9. +n the *ast majorit. of cases the assets ac&uired and liabilities assumed in a business
combination are recorded at their fair *alues. +f the fair *alue of the consideration
transferred 5including an. contingent consideration6 is less than the total net fair *alue
assigned to the assets ac&uired and liabilities assumed" then an ordinar. gain on
bargain purchase is recogni(ed for the difference.
%0. Shares issued are recorded at fair *alue as if the stoc- had been sold and the mone.
obtained used to ac&uire the subsidiar.. The Common Stoc- account is recorded at the
par *alue of these shares 'ith an. e,cess amount attributed to additional paid)in capital.
%%. The direct combination costs of D9"000 are allocated to e,pense in the period in 'hich
the. occur. Stoc- issue costs of D!B"000 are treated as a reduction of A:+C.
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Ans$ers t Pr&le's
() D
2) *
+) D
,) A
-) *
.) A
/) A
0) *
1) C
(2) * Cnsi!eratin trans#erre! 3#air 4alue5 60227222
Cash 6(-27222
Accunts recei4a&le (,27222
S#t$are +227222
Research an! !e4elp'ent asset 2227222
Lia&ilities 3(+27222 5
Fair 4alue # net identifiable assets ac8uire! .027222
9!$ill 6(227222
(() C Le"al an! accuntin" #ees accunts pa:a&le 6(-7222
Cntin"ent lia&ililit: 227222
Dn4an;s lia&ilities assu'e! .27222
Lia&ilities assu'e! r incurre! 61-7222
(2) D Cnsi!eratin trans#erre! 3#air 4alue5 6,227222
Current assets 6127222
*uil!in" an! e8uip'ent 2-27222
<npatente! technl": 2-7222
Research an! !e4elp'ent asset ,-7222
Lia&ilities 3.27222 5
Fair 4alue # net identifiable assets ac8uire! +-27222
9!$ill 6 /27222
Current assets 6 127222
*uil!in" an! e8uip'ent 2-27222
<npatente! technl": 2-7222
Research an! !e4elp'ent asset ,-7222
9!$ill /27222
Ttal assets 6,027222
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(+) C =alue # shares issue! 3-(7222 > 6+5)))))))))))))))))))))))))))))))))))))))) 6(-+7222
Par 4alue # shares issue! 3-(7222 > 6(5))))))))))))))))))))))))))))))))) -(7222
A!!itinal pai!?in capital 3ne$ shares5 )))))))))))))))))))))))))))))))))) 6(227222
A!!itinal pai!?in capital 3e@istin" shares5 ))))))))))))))))))))))))))) 127222
Cnsli!ate! a!!itinal pai!?in capital 3#air 4alue5))))))))))))))) 6(127222
At the ac8uisitin !ate7 the parent 'aAes n chan"e t retaine! earnin"s)
(,) * Cnsi!eratin trans#erre! 3#air 4alue5))))))))))))))))))))))))))) 6,227222
*A 4alue # su&si!iar: 3assets 'inus lia&ilities5)) ) ) 3+2272225
Fair 4alue in e@cess # &A 4alue)))))))))))))))))))))))))))) (227222
Allcatin # e@cess #air 4er &A 4alue
i!enti#ie! $ith speci#ic accunts:
In4entr:))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) +27222
Patente! technl":))))))))))))))))))))))))))))))))))))))))))))))))))) 227222
*uil!in"s an! e8uip'ent))))))))))))))))))))))))))))))))))))))))))) 2-7222
Ln"?ter' lia&ilities)))))))))))))))))))))))))))))))))))))))))))))))))))) (27222
9!$ill))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) 6(-7222
(-) D Hill patente! technl":)))))))))))))))))))))))))))))))))))))))))))))))) 62+27222
Lrin" patente! technl": 3#air 4alue5))))))))))))))))))))))) 2227222
Ac8uisitin?!ate cnsli!ate! &alance sheet 4alue) ) ) 6,+27222
(.) a) An intan"i&le asset ac8uire! in a &usiness c'&inatin is rec"niBe! as
an asset apart #r' "!$ill i# it arises #r' cntractual r ther le"al
ri"hts 3re"ar!less # $hether thse ri"hts are trans#era&le r separa&le
#r' the ac8uire! enterprise r #r' ther ri"hts an! &li"atins5) I# an
intan"i&le asset !es nt arise #r' cntractual r ther le"al ri"hts7 it
shall &e rec"niBe! as an asset apart #r' "!$ill nl: i# it is separa&le7
that is7 it is capa&le # &ein" separate! r !i4i!e! #r' the ac8uire!
enterprise an! sl!7 trans#erre!7 license!7 rente!7 r e@chan"e!
3re"ar!less # $hether there is an intent t ! s5) An intan"i&le asset that
cannt &e sl!7 trans#erre!7 license!7 rente!7 r e@chan"e! in!i4i!uall: is
cnsi!ere! separa&le i# it can &e sl!7 trans#erre!7 license!7 rente!7 r
e@chan"e! $ith a relate! cntract7 asset7 r lia&ilit:)
&) Tra!e'arAsCusuall: 'eet &th the separa&ilit: an! le"alDcntractual
criteria)
Cust'er listCusuall: 'eets the separa&ilit: criterin)
Cp:ri"hts n artistic 'aterialsCusuall: 'eet &th the separa&ilit: an!
le"alDcntractual criteria)
A"ree'ents t recei4e r:alties n lease! intellectual prpert:Cusuall:
'eet the le"alDcntractual criterin)
<npatente! technl":C'a: 'eet the separa&ilit: criterin i# capa&le
# &ein" sl! e4en i# in cnEunctin $ith a relate! cntract7 asset7 r
lia&ilit:)
(/) 3(2 'inutes5 3Furnal entries t recr! a 'er"erCac8uire! c'pan:
!issl4e!5
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In4entr: .227222
Lan! 1127222
*uil!in"s 272227222
Cust'er Relatinships 0227222
9!$ill .127222
Accunts Pa:a&le 027222
C''n StcA ,27222
A!!itinal Pai!?In Capital 1.27222
Cash ,72227222
Pr#essinal Ser4ices E@pense ,27222
Cash ,27222
A!!itinal Pai!?In Capital 2-7222
Cash 2-7222
(0) 3(2 'inutes5 3Furnal entries t recr! a &ar"ain purchaseCac8uire! c'pan:
!issl4e!5
In4entr: .227222
Lan! 1127222
*uil!in"s 272227222
Cust'er Relatinships 0227222
Accunts Pa:a&le 027222
Cash ,72227222
9ain n *ar"ain Purchase ((27222
Pr#essinal Ser4ices E@pense ,27222
Cash ,27222
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(1) 3(- Minutes5 3Cnsli!ate! &alances5
In ac8uisitins7 the #air 4alues # the su&si!iar:Gs assets an! lia&ilities are
cnsli!ate! 3there are a li'ite! nu'&er # e@ceptins5) 9!$ill is reprte!
at 60272227 the a'unt that the 6/.27222 cnsi!eratin trans#erre! e@cee!s
the 6.027222 #air 4alue # Sl;s net assets ac8uire!)
In4entr: H 6./27222 3Pa!reGs &A 4alue plus SlGs #air 4alue5
Lan! H 6/(27222 3Pa!reGs &A 4alue plus SlGs #air 4alue5
*uil!in"s an! e8uip'ent H 61+27222 3Pa!reGs &A 4alue plus SlGs #air
4alue5
Franchise a"ree'ents H 6,,27222 3Pa!reGs &A 4alue plus SlGs #air
4alue5
9!$ill H 6027222 3calculate! a&4e5
Re4enues H 61.27222 3nl: parent c'pan: peratinal #i"ures are
reprte! at !ate # ac8uisitin5
A!!itinal pai!?in capital H 62.-7222 3Pa!reGs &A 4alue a!Euste! #r
stcA issue less stcA issuance csts5
E@penses H 61,27222 3nl: parent c'pan: peratinal #i"ures plus
ac8uisitin?relate! csts are reprte! at !ate # ac8uisitin5
Retaine! earnin"s7 (D( H 6+127222 3Pa!reGs &A 4alue5
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22) 322 'inutes5 Furnal entries #r a 'er"er usin" alternati4e 4alues)
a. Acquisition date fair values:
Cash pai! 6/227222
Cntin"ent per#r'ance lia&ilit: +-7222
Cnsi!eratin trans#erre! 6/+-7222
Fair 4alues # net assets ac8uire! /-27222
9ain n &ar"ain purchase 6 (-7222

Recei4a&les 127222
In4entr: /-7222
Cp:ri"hts ,027222
Patente! Technl": /227222
Research an! De4elp'ent Asset 2227222
Current lia&ilities (.27222
Ln"?Ter' Lia&ilities .+-7222
Cash /227222
Cntin"ent Per#r'ance Lia&ilit: +-7222
9ain n *ar"ain Purchase (-7222
Pr#essinal Ser4ices E@pense (227222
Cash (227222
b. Acquisition date fair values:

Cash pai! 60227222
Cntin"ent per#r'ance lia&ilit: +-7222
Cnsi!eratin trans#er 60+-7222
Fair 4alues # net assets ac8uire! /-27222
9!$ill 6 0-7222

Recei4a&les 127222
In4entr: /-7222
Cp:ri"hts ,027222
Patente! Technl": /227222
Research an! De4elp'ent Asset 2227222
9!$ill 0-7222
Current Lia&ilities (.27222
Ln"?Ter' Lia&ilities .+-7222
Cash 0227222
Cntin"ent Per#r'ance Lia&ilit: +-7222
Pr#essinal Ser4ices E@pense (227222
Cash (227222
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2() 322 Minutes5 3Deter'ine selecte! cnsli!ate! &alances5
<n!er the ac8uisitin 'eth!7 the shares issue! &: Iiscnsin are recr!e! at
#air 4alue usin" the #ll$in" Eurnal entr::
In4est'ent in *a!"er 34alue # !e&t an! shares issue!5) 1227222
C''n StcA 3par 4alue5))))))))))))))))))))))))))))))))))))))))))))) (-27222
A!!itinal Pai!?In Capital 3e@cess 4er par 4alue5))))) ,-27222
Lia&ilities)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) +227222
The pa:'ent t the &rAer is accunte! #r as an e@pense) The stcA issue
cst is a re!uctin in a!!itinal pai!?in capital)
Pr#essinal Ser4ices E@pense))))))))))))))))))))))))))))))))))))))))))) +27222
A!!itinal Pai!?In Capital)))))))))))))))))))))))))))))))))))))))))))))))))))) ,27222
Cash )))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) /27222
Allocation of Acquisition-Date Excess Fair Value:
Cnsi!eratin trans#erre! 3#air 4alue5 #r *a!"er StcA 61227222
*A =alue # *a!"er7 .D+2)))))))))))))))))))))))))))))))))))))))))))))))))) //27222
Fair =alue in E@cess # *A =alue))))))))))))))))))))))))))))))) 6(+27222
E@cess #air 4alue 3un!er4alue! e8uip'ent5)))))))))))))))))))))) (227222
E@cess #air 4alue 34er4alue! patente! technl":5))))))) 32272225
9!$ill))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) 6 -27222
CONSOLIDATED *ALANCES:
Net inc'e 3a!Euste! #r pr#essinal ser4ices e@pense) The
#i"ures earne! &: the su&si!iar: prir t the taAe4er
are nt inclu!e!5)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) 6 2(27222
Retaine! earnin"s7 (D( 3the #i"ures earne! &: the su&si!iar:
prir t the taAe4er are nt inclu!e!5)))))))))))))))))))))))))))))))))))) 0227222
Patente! technl": 3the parentGs &A 4alue plus the #air
4alue # the su&si!iar:5))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) (7(027222
9!$ill 3c'pute! a&4e5)))))))))))))))))))))))))))))))))))))))))))))))))))))) -27222
Lia&ilities 3the parentGs &A 4alue plus the #air 4alue
# the su&si!iar:Gs !e&t plus the !e&t issue! &: the parent
in ac8uirin" the su&si!iar:5)))))))))))))))))))))))))))))))))))))))))))))))))))))) (72(27222
C''n stcA 3the parentGs &A 4alue a#ter recr!in"
the ne$l:?issue! shares5)))))))))))))))))))))))))))))))))))))))))))))))))))))))))) -(27222
A!!itinal Pai!?in Capital 3the parentGs &A 4alue
a#ter recr!in" the t$ entries a&4e5)))))))))))))))))))))))))))))))))))) .027222
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2013 by McGraw-Hill Education. This is proprietary material solely or authori!ed instructor use. "ot authori!ed or sale or distribution in any
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22) 322 'inutes5 3Preparatin # a cnsli!ate! &alance sheet5J
PINNACLE COMPANK AND CONSOLIDATED S<*SIDIARK STRATA
IrAsheet #r a Cnsli!ate! *alance Sheet
Fanuar: (7 22(+
Pinnacle Strata A!Eust ) L Eli') Cnsli!ate!
Cash ,++7222 (227222 ---7222
Accunts recei4a&le (72(27222 20+7222 (7,1+7222
In4entr: (72+-7222 +-27222 (7-0-7222
In4est'ent in Strata +72227222 2 3S5 27.227222
3A5 .227222 2
*uil!in"s 3net5 -7-/27222 (70,-7222 3A5 +227222 /7/(/7222
Licensin" a"ree'ents 2 +72227222 3A5 (227222 271227222
9!$ill +-27222 2 3A5 ,227222 /-27222
Ttal assets (272227222 -7.227222 (-72227222
Accunts pa:a&le 3+2272225 3+/-72225 3./-72225
Ln"?ter' !e&t 327/2272225 327.2-72225 3-7+2-72225
C''n stcA 3+722272225 3(722272225 3S5 (72227222 3+722272225
A!!itinal pai!?in cap) 2 3-2272225 3S5 -227222 2
Retaine! earnin"s 3.72227222 5 3(7(227222 5 3S5 (7(227222 3.72227222 5
Ttal lia&) L e8uities 3(272227222 5 3-7.227222 5 +7+227222 +7+227222
3(-72227222 5
JAlthu"h this slutin uses a $rAsheet t c'pute the cnsli!ate! a'unts7 the
pr&le' !es nt re8uire it)
2+) 3-2 Minutes5 3Deter'ine cnsli!ate! &alances #r a &ar"ain purchase)5
a) Marshall;s ac8uisitin # TucAer represents a &ar"ain purchase &ecause
the #air 4alue # the net assets ac8uire! e@cee!s the #air 4alue # the
cnsi!eratin trans#erre! as #ll$s:
Fair 4alue # net assets ac8uire! 6-(-7222
Fair 4alue # cnsi!eratin trans#erre! ,227222
9ain n &ar"ain purchase 6((-7222
In a &ar"ain purchase7 the ac8uisitin is recr!e! at the #air 4alue # the
net assets ac8uire! instea! # the #air 4alue # the cnsi!eratin
trans#erre! 3an e@ceptin t the "eneral rule5)
Prir t preparin" a cnsli!atin $rAsheet7 Marshall recr!s the three
transactins that ccurre! t create the &usiness c'&inatin)
In4est'ent in TucAer)))))))))))))))))))))))))))))))))))))))))))))))) -(-7222
Ln"?ter' Lia&ilities)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) 2227222
C''n StcA 3par 4alue5)))))))))))))))))))))))))))))))))))))))))))))))))))))) 227222
A!!itinal Pai!?In Capital)))))))))))))))))))))))))))))))))))))))))))))))))))))))) (027222
9ain n *ar"ain Purchase))))))))))))))))))))))))))))))))))))))))))))))))))))))) ((-7222
3T recr! lia&ilities an! stcA issue! #r TucAer ac8uisitin #air 4alue5
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2+) (continued)
Pr#essinal Ser4ices E@pense)))))))))))))))))))))))))) +27222
Cash )))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) +27222
3t recr! pa:'ent # pr#essinal #ees5
A!!itinal Pai!?In Capital)))))))))))))))))))))))))))))))))))) (27222
Cash )))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) (27222
3T recr! pa:'ent # stcA issuance csts5
MarshallGs trial &alance is a!Euste! #r these transactins 3as sh$n in the
$rAsheet that #ll$s5)
Ne@t7 the #air # the 6,227222 in4est'ent is allcate!:
Cnsi!eratin trans#erre! at #air 4alue)))))))))))))))))))))))))))))))))))) 6,227222
*A 4alue 3assets 'inus lia&ilities r
ttal stcAhl!ersG e8uit:5))))))))))))))))))))))))))))))))))))))))))))))))))) ,.27222
*A 4alue in e@cess # cnsi!eratin trans#erre! ))))))))) 3.272225
Allcatin t speci#ic accunts &ase! n #air 4alue:
In4entr:))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) -7222
Lan! ))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) 227222
*uil!in"s))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) +27222 --7222
9ain n &ar"ain purchase 3e@cess net asset #air 4alue
4er cnsi!eratin trans#erre!5)))))))))))))))))))))))))))))))))))))))))) 63((-72225
CONSOLIDATED TOTALS
Cash H 6+07222) A!! the t$ &A 4alues less ac8uisitin an! stcA issue
csts
Recei4a&les H 6+.27222) A!! the t$ &A 4alues)
In4entr: H 6-2-7222) A!! the t$ &A 4alues plus the #air 4alue
a!Eust'ent
Lan! H 6,227222) A!! the t$ &A 4alues plus the #air 4alue a!Eust'ent)
*uil!in"s H 6./27222) A!! the t$ &A 4alues plus the #air 4alue
a!Eust'ent)
E8uip'ent H 62(27222) A!! the t$ &A 4alues)
Ttal assets H 627(0+7222) Su''atin # the a&4e in!i4i!ual #i"ures)
Accunts pa:a&le H 6(127222) A!! the t$ &A 4alues)
Ln"?ter' lia&ilities H 60+27222) A!! the t$ &A 4alues plus the !e&t
incurre! &: the parent in ac8uirin" the su&si!iar:)
C''n stcA H 6(+27222)The parentGs &A 4alue a#ter stcA issue t
ac8uire the su&si!iar:)
A!!itinal pai!?in capital H 6-207222)The parentGs &A 4alue a#ter the stcA
issue t ac8uire the su&si!iar: less the stcA issue csts)
Retaine! earnin"s H 6-2-7222) Parent c'pan: &alance less 6+27222 in
pr#essinal ser4ices e@pense plus 6((-7222 "ain n &ar"ain purchase)
Ttal lia&ilities an! e8uit: H 627(0+7222) Su''atin # the a&4e #i"ures)
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2+) (continued)
&) MARSHALL COMPANK AND CONSOLIDATED S<*SIDIARK
IrAsheet
Fanuar: (7 22(+
Marshall Tucer !onsolidation Entries !onsolidated
Accounts !o"#an$% !o"#an$ Debit !redit Totals
Cash))))))))))))))))))))))))))))))))))))))))))))) (07222 227222 +07222
Recei4a&les )))))))))))))))))))))))))))))))) 2/27222 127222 +.27222
In4entr: ))))))))))))))))))))))))))))))))))))) +.27222 (,27222 3A5 -7222 -2-7222
Lan! )))))))))))))))))))))))))))))))))))))))))))) 2227222 (027222 3A5 227222 ,227222
*uil!in"s 3net5 )))))))))))))))))))))))))))) ,227222 2227222 3A5 +27222 ./27222
E8uip'ent 3net5 ))))))))))))))))))))))))) (.27222 -27222 2(27222
In4est'ent in TucAer ))))))))))))))))) -(-7222 3S5 ,.27222
3A5 --7222 ?2?
Ttal assets )))))))))))))))))))))))))))))))) (71,+7222 /227222 27(0+7222
Accunts pa:a&le))))))))))))))))))))))) 3(-272225 3,272225 3(1272225
Ln"?ter' lia&ilities )))))))))))))))))) 3.+272225 322272225 30+272225
C''n stcA ))))))))))))))))))))))))))) 3(+272225 3(2272225 3S5 (227222 3(+272225
A!!itinal pai!?in capital )))))))))) 3-2072225 ?2? 3-2072225
Retaine! earnin"s7 (D(D(+ ))))))))) 3 -2-72225 3+,272225 3S5 +,27222 3-2-72225
Ttal lia&) an! $ners; e8uit:) ) ) 3(71,+72225 3/2272225 -(-7222 -(-7222327(0+72225
MarshallGs accunts ha4e &een a!Euste! #r ac8uisitin entries 3see part a)5)
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2,) 3Prepare a cnsli!ate! &alance sheet5
Cnsi!eratin trans#erre! at #air 4alue)))))))))))))) 6,1-7222
*A 4alue))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) 2.-7222
E@cess #air 4er &A 4alue)))))))))))))))))))))))))))))))) 2+27222
Allcatin # e@cess #air 4alue t
speci#ic assets an! lia&ilities:
t c'puter s#t$are))))))))))))))))))))))))))))))))))))) 6-27222
t e8uip'ent)))))))))))))))))))))))))))))))))))))))))))))))))))) 3(272225
t client cntracts))))))))))))))))))))))))))))))))))))))))))) (227222
t in?prcess research an! !e4elp'ent ) ) ) ,27222
t ntes pa:a&le)))))))))))))))))))))))))))))))))))))))))))))) 3-7222 5 (/-7222
9!$ill)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) 6 --7222
Pratt Spi!er De&it Cre!it Cnsli!ate!
Cash +.7222 (07222 -,7222
Recei4a&les ((.7222 -27222 (.07222
In4entr: (,27222 127222 2+27222
In4est'ent in Spi!er ,1-7222 ?2? 3S5 2.-7222
3A5 2+27222 ?2?
C'puter s#t$are 2(27222 227222 3A5 -27222 2027222
*uil!in"s 3net5 -1-7222 (+27222 /2-7222
E8uip'ent 3net5 +207222 ,27222 3A5 (27222 ++07222
Client cntracts ?2? ?2? 3A5 (227222 (227222
Research an!
!e4lp'ent asset ?2? ?2? 3A5 ,27222 ,27222
9!$ill ?2? ?2 ? 3A5 --7222 --7222
Ttal assets (71227222 +-27222 (71127222
Accunts pa:a&le 30072225 32-72225 3((+72225
Ntes pa:a&le 3-(272225 3.272225 3A5 -7222 3-/-72225
C''n stcA 3+0272225 3(2272225 3S5(227222 3+0272225
A!!itinal pai!?in
capital 3(/272225 32-72225 3S5 2-7222 3(/272225
Retaine! earnin"s 3/-27222 5 3(,27222 5 3S5(,27222 3/-27222 5
Ttal lia&ilities
an! e8uities 3(712272225 3+-272225 -(27222 -(27222 3(711272225
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2,) (continued) Pratt C'pan: an! Su&si!iar:
Cnsli!ate! *alance Sheet
Dece'&er +(7 22(+
Assets &iabilities and '(ners) Equit$
Cash 6 -,7222 Accunts pa:a&le 6 ((+7222
Recei4a&les (.07222 Ntes pa:a&le -/-7222
In4entr: 2+27222
C'puter s#t$are 2027222
*uil!in"s 3net5 /2-7222
E8uip'ent 3net5 ++07222
Client cntracts (227222
Research an! C''n stcA +027222
!e4elp'ent asset ,27222 A!!itinal pai! in capital (/27222
9!$ill --7222 Retaine! earnin"s /-27222
Ttal assets 6(71127222 Ttal lia&ilities an! e8uities 6(71127222
2-) 3(- 'inutes5 3Ac8uisitin 'eth! entries #r a 'er"er5
Case (: Fair 4alue # cnsi!eratin trans#erre! 6(,-7222
Fair 4alue # net i!enti#ia&le assets (227222
E@cess t "!$ill 62-7222
Case ( Eurnal entr: n Allertn;s &As:
Current Assets .27222
*uil!in" -27222
Lan! 227222
Tra!e'arA +27222
9!$ill 2-7222
Lia&ilities ,27222
Cash (,-7222
Case 2: *ar"ain Purchase un!er ac8uisitin 'eth!
Fair 4alue # cnsi!eratin trans#erre! 6((27222
Fair 4alue # net i!enti#ia&le assets (227222
9ain n &ar"ain purchase 6 (27222
Case 2 Eurnal entr: n Allertn;s &As:
Current Assets .27222
*uil!in" -27222
Lan! 227222
Tra!e'arA +27222
9ain n *ar"ain Purchase (27222
Lia&ilities ,27222
Cash ((27222
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Pr&le' 2-) 3cntinue!5
In a &ar"ain purchase7 the ac8uisitin 'eth! e'pl:s the #air 4alue # the net
i!enti#ia&le assets ac8uire! as the &asis #r recr!in" the ac8uisitin) *ecause
this &asis e@cee!s the a'unt pai!7 Allertn rec"niBes a "ain n &ar"ain
purchase) This is an e@ceptin t the "eneral rule # usin" the #air 4alue # the
cnsi!eratin trans#erre! as the &asis #r recr!in" the c'&inatin)
2.) 32- 'inutes5 3C'&inatin entriesCac8uire! entit: !issl4e!5
Cash cnsi!eratin trans#erre! 6+227222
Cntin"ent per#r'ance &li"atin (-7222
Cnsi!eratin trans#erre! 3#air 4alue5 +(-7222
Fair 4alue # net i!enti#ia&le assets 2027222
9!$ill 6 ++7222
*ournal entries:
Recei4a&les 027222
In4entr: /27222
*uil!in"s ((-7222
E8uip'ent 2-7222
Cust'er List 227222
Research an! De4elp'ent Asset +27222
9!$ill ++7222
Current Lia&ilities (27222
Ln"?Ter' Lia&ilities -27222
Cntin"ent Per#r'ance Lia&ilit: (-7222
Cash +227222
Pr#essinal Ser4ices E@pense (27222
Cash (27222
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2/) 3+2 Minutes5 3O4er4ie$ # the steps in appl:in" the ac8uisitin 'eth! $hen
shares ha4e &een issue! t create a c'&inatin) Part h) inclu!es a &ar"ain
purchase)5
a) The #air 4alue # the cnsi!eratin inclu!es
Fair 4alue # stcA issue! 6(7-227222
Cntin"ent per#r'ance &li"atin +27222
Fair 4alue # cnsi!eratin trans#erre! 6(7-+27222
&) StcA issue csts re!uce a!!itinal pai!?in capital)
c) In a &usiness c'&inatin7 !irect ac8uisitin csts 3such as #ees pai! t
in4est'ent &anAs #r arran"in" the transactin5 as e@penses)
!) The par 4alue # the 227222 shares issue! is recr!e! as an increase #
6227222 in the C''n StcA accunt) The 6/, #air 4alue in e@cess # par
4alue 36/- M 6(5 is an increase t a!!itinal pai!?in capital # 6(7,027222
36/, > 227222 shares5)
e) Fair 4alue # cnsi!eratin trans#erre! 3a&4e5 6(7-+27222
Recei4a&les 6 027222
Patente! technl": /227222
Cust'er relatinships -227222
In?prcess research an! !e4elp'ent +227222
Lia&ilities 3,2272225 (7(027222
9!$ill 6 +-27222
#) Re4enues an! e@penses # the su&si!iar: #r' the peri! prir t the
c'&inatin are 'itte! #r' the cnsli!ate! ttals) Onl: the
peratinal #i"ures #r the su&si!iar: a#ter the purchase are applica&le t
the &usiness c'&inatin) The pre4ius $ners earne! an: pre4ius
pr#its)
") The su&si!iar:;s C''n StcA an! A!!itinal Pai!?in Capital accunts
ha4e n i'pact n the cnsli!ate! ttals)
h) The #air 4alue # the cnsi!eratin trans#erre! is n$ 6(72+27222) This
a'unt in!icates a &ar"ain purchase calculate! as #ll$s:
Fair 4alue # cnsi!eratin trans#erre! 6(72+27222
Recei4a&les 6 027222
Patente! technl": /227222
Cust'er relatinships -227222
Research an! !e4elp'ent asset +227222
Lia&ilities 3,2272225 (7(027222
9ain n &ar"ain purchase 6 (-27222
The 4alues # Sa#eData;s assets an! lia&ilities $ul! &e recr!e! at #air
4alue7 &ut there $ul! &e n "!$ill rec"niBe! an! a "ain n &ar"ain
purchase $ul! &e reprte!)
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20) 3-2 Minutes5 3Prepare &alance sheet #r a statutr: 'er"er usin" the
ac8uisitin 'eth!) Als7 use $rAsheet t !eri4e cnsli!ate! ttals)5
a) In accuntin" #r the c'&inatin # Ne$Tune an! On?the?97 the #air 4alue #
the ac8uisitin is allcate! t each i!enti#ia&le asset an! lia&ilit: ac8uire! $ith
an: re'ainin" e@cess attri&ute! t "!$ill)
Fair 4alue # cnsi!eratin trans#erre! 3shares issue!5 6/-27222
Fair 4alue # net assets ac8uire!:
Cash 6 217222
Recei4a&les .+7222
Tra!e'arAs 22-7222
Recr! 'usic catal" (027222
In?prcess research an! !e4elp'ent 2227222
E8uip'ent (2-7222
Accunts pa:a&le 3+,72225
Ntes pa:a&le 3,-72225 /2+7222
9!$ill 6 2/7222
Furnal entries &: Ne$Tune t recr! c'&inatin $ith On?the?9:
Cash 217222
Recei4a&les .+7222
Tra!e'arAs 22-7222
Recr! Music Catal" (027222
Research an! De4elp'ent Asset 2227222
E8uip'ent (2-7222
9!$ill 2/7222
Accunts Pa:a&le +,7222
Ntes Pa:a&le ,-7222
C''n StcA 3Ne$Tune par 4alue5 .27222
A!!itinal Pai!?In Capital .127222
3T recr! 'er"er $ith On?the?9 at #air 4alue5
A!!itinal Pai!?In Capital 2-7222
Cash 2-7222
3StcA issue csts incurre!5
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+roble" ,- (continued):
+ost-!o"bination .alance /heet:
Assets Lia&ilities an! O$ners; E8uit:
Cash 6 .,7222 Accunts pa:a&le 6 (,,7222
Recei4a&les 2(+7222 Ntes pa:a&le ,(-7222
Tra!e'arAs .2-7222
Recr! 'usic catal" (72227222
Research an!
!e4elp'ent asset 2227222 C''n stcA ,.27222
E8uip'ent ,2-7222 A!!itinal pai!?in capital .1-7222
9!$ill 2/7222 Retaine! earnin"s 0.27222
Ttal 627-/,7222 Ttal 627-/,7222
&) *ecause On?the?9 cntinues as a separate le"al entit:7 Ne$Tune #irst recr!s
the ac8uisitin as an in4est'ent in the shares # On?the?9)
Furnal entries:
In4est'ent in On?the?9 /-27222
C''n StcA 3Ne$Tune7 Inc)7 par 4alue5 .27222
A!!itinal Pai!?In Capital .127222
3T recr! ac8uisitin # On?the?9Gs shares5
A!!itinal Pai!?In Capital 2-7222
Cash 2-7222
3StcA issue csts incurre!5
Ne@t7 Ne$Tune;s accunts are a!Euste! #r the entries a&4e t #acilitate
the $rAsheet preparatin # the cnsli!ate! #inancial state'ents)
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20) 3cntinue!5 NEIT<NE7 INC)7 AND ON?THE?9O CO)
&) Cnsli!atin IrAsheet
Fanuar: (7 22(+
!onsolidation Entries !onsolidated
Accounts 0e(Tune1 2nc. 'n-the-3o !o. Debit !redit Totals
Cash +-7222 217222 .,7222
Recei4a&les (-27222 .-7222 3A5 27222 2(+7222
In4est'ent in On?the?9 /-27222 ?2? 3S5 2/27222
3A5 ,027222 ?2?
Tra!e'arAs ,227222 1-7222 3A5 (+27222 .2-7222
Recr! 'usic catal" 0,27222 .27222 3A5 (227222 (72227222
Research an! !e4elp'ent asset ?2? ?2? 3A5 2227222 2227222
E8uip'ent +227222 (2-7222 ,2-7222
9!$ill ?2 ? ?2? 3A5 2/7222 2/7222
Ttals 27,1-7222 +-,7222 27-/,7222
Accunts pa:a&le ((27222 +,7222 (,,7222
Ntes pa:a&le +/27222 -27222 3A5 -7222 ,(-7222
C''n stcA ,.27222 -27222 3S5 -27222 ,.27222
A!!itinal pai!?in capital .1-7222 +27222 3S5 +27222 .1-7222
Retaine! earnin"s 0.27222 (1272223S5 (127222 0.27222
Ttals 27,1-7222 +-,7222 /-27222 /-27222 27-/,7222
0ote: The accunts # Ne$Tune ha4e alrea!: &een a!Euste! #r the #irst three Eurnal entries in!icate! in the ans$er t Part
&) t recr! the ac8uisitin #air 4alue an! the stcA issuance csts)
The cnsli!atin entries are !esi"ne! t:
Eli'inate the stcAhl!ers; e8uit: accunts # the su&si!iar: 3S5
Recr! all su&si!iar: assets an! lia&ilities at #air 4alue 3A5
Rec"niBe the "!$ill in!icate! &: the ac8uisitin #air 4alue 3A5
Eli'inate the In4est'ent in On?the?9 accunt 3S7 A5
c) The cnsli!ate! &alance sheets in parts a) an! &) a&4e are i!entical) The #inancial reprtin" cnse8uences #r a (22N
stcA ac8uisitin 4s) a 'er"er are the sa'e) The ecn'ic su&stances # the t$ #r's # the transactin are i!entical
an!7 there#re7 s are the resultin" #inancial state'ents) The !i##erence is in the Eurnal entr: t recr! the ac8uisitin in
the parent c'pan: &As)
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21) 3,2 'inutes5 3Prepare a cnsli!ate! &alance sheet usin" the ac8uisitin
'eth!5)
a) Furnal entries t recr! the ac8uisitin n Paci#ica;s recr!s)
In4est'ent in Se"urs (72.27-22
C''n StcA 3-27222 > 6-5 2-27222
A!!itinal Pai!?In Capital 3-27222 > 6(-5 /-27222
Cntin"ent Per#r'ance O&li"atin .27-22
The cntin"ent cnsi!eratin is c'pute! as:
6(+27222 pa:'ent > -2N pr&a&ilit: > 2)1.(-+0 present 4alue #actr
Pr#essinal Ser4ices E@pense (-7222
Cash (-7222
A!!itinal Pai!?In Capital 17222
Cash 17222
&) an! c)
Paci#ica Se"urs Cnsli!atin Entries
Cnsli!ate!
*alance
Sheet
Re4enues 3(722272225 3(722272225
E@penses 0127222 0127222
Net inc'e 3+(272225 3+(272225
Retaine! earnin"s7 (D( 31-272225 31-272225
Net inc'e 3+(272225 3+(272225
Di4i!en!s pai! 127222 127222
Retaine! earnin"s7 (2D+( 3(7(/272225 3(7(/272225
Cash 0.7222 0-7222 (/(7222
Recei4a&les an! in4entr: /-27222 (127222 3A5 (27222 1+27222
Prpert:7 plant an! e8uip'ent (7,227222 ,-27222 3A5(-27222 272227222
In4est'ent in Se"urs (72.27-22 3S5 /2-7222 2
3A5 +-/7-22
Research an! !e4elp'ent asset 3A5(227222 (227222
9!$ill 3A5 //7-22 //7-22
Tra!e'arAs +227222 (.27222 3A5 ,27222 -227222
Ttal assets +7-107-22 00-7222 +7//07-22
Lia&ilities 3-2272225 3(0272225 3.0272225
Cntin"ent per#r'ance &li"atin 3.27-225 3.27-225
C''n stcA 3.-272225 322272225 3S5 2227222 3.-272225
A!!itinal pai!?in capital 3(72(.72225 3/272225 3S5 /27222 3(72(.72225
Retaine! earnin"s 3(7(/272225 3,+-72225 3S5 ,+-7222


3(7(/272225
Ttal lia&ilities an! e8uities 3+7-107-225 300-72225 (72/27-22 (72/27-22 3+7//07-225
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Ans$ers t Appen!i@ Pr&le's
45. 32- 'inutes5 Furnal entries #r a 'er"er usin" le"ac: purchase 'eth!)
Als c'pare t ac8uisitin 'eth!)
a. +urchase Method
6. Purchase price 3inclu!in" ac8uisitin csts5 6.+-7222
Fair 4alues # net assets ac8uire! -2-7222
9!$ill 6((27222
*ournal entr$:
Current Assets 027222
E8uip'ent (027222
Tra!e'arA +227222
9!$ill ((27222
Lia&ilities --7222
Cash .+-7222
,. Acquisition date fair values:

Purchase price 3inclu!in" ac8uisitin csts5 6,-27222
Fair 4alues # net assets ac8uire! -2-7222
*ar"ain purchase 36 /-72225

Allocation of bar7ain #urchase to lon7-ter" assets acquired:
Ttal Asset
Fair 4alue Prp) re!uctin re!uctin
E8uip'ent 6(027222 +.N @ 6/-7222 H 62/7222
Tra!e'arA +227222 .,N @ /-7222 H ,07222
6-227222 6/-7222
*ournal entr$:
Current Assets 027222
E8uip'ent 36(027222 M 62/72225 (-+7222
Tra!e'arA 36+227222 M 6,072225 2/27222
Lia&ilities --7222
Cash ,-27222
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+2) cntinue!
b. Acquisition Method
6. Cnsi!eratin trans#erre! 6 .(27222
Fair 4alues # net assets ac8uire! -2-7222
9!$ill 6 0-7222
*ournal entr$:
Current Assets 027222
E8uip'ent (027222
Tra!e'arA +227222
9!$ill 0-7222
Lia&ilities --7222
Cash .(27222
Pr#essinal Ser4ices E@pense 2-7222
Cash 2-7222
,. Cnsi!eratin trans#erre! 6,2-7222
Fair 4alues # net assets ac8uire! -2-7222
9ain n &ar"ain purchase 36(2272225

*ournal entr$:
Current Assets 027222
E8uip'ent (027222
Tra!e'arA +227222
Lia&ilities --7222
9ain n *ar"ain Purchase (227222
Cash ,2-7222
Pr#essinal Ser4ices E@pense 2-7222
Cash 2-7222
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+() 32- 'inutes5 3Plin" 4s) purchase in4l4in" an unrecr!e! intan"i&le5
a) Purchase Plin"
In4entr: 6 .-27222 6 .227222
Lan! /-27222 ,-27222
*uil!in"s (72227222 1227222
<npatente! technl": (7-227222 ?2?
9!$ill .227222 ?2?
Ttal 6,7-227222 6(71-27222
&) Pre?ac8uisitin re4enues an! e@penses $ere e@clu!e! #r' cnsli!ate!
results un!er the purchase 'eth!7 &ut $ere inclu!e! un!er the plin"
'eth!)
c) Plin"s7 in 'st cases7 pr!uce hi"her rates # return n assets than
purchase accuntin" &ecause the !en'inatr t:picall: is 'uch l$er) In
the case # the S$i'$ear ac8uisitin plin" pr!uce! an incre'ent t
ttal assets # 6(71-27222 c'pare! t 6,7-227222 un!er purchase
accuntin") Future EPS un!er plin"s $ere als hi"her &ecause # l$er
#uture !epreciatin an! a'rtiBatin # the s'aller asset &ase)
Mana"ers $hse c'pensatin cntracts in4l4e! accuntin" per#r'ance
'easures clearl: ha! incenti4es t use plin" # interest accuntin"
$hene4er pssi&le)
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Chapter 2 De4elp Kur SAills
CONSIDERATION OR COMPENSATION CASE 3esti'ate! ti'e ,2 'inutes5
Accr!in" t FAS* ASC 302-?(2?--?2-5:
I# it is nt clear $hether an arran"e'ent #r pa:'ents t e'pl:ees r sellin"
sharehl!ers is part # the e@chan"e #r the ac8uiree r is a transactin separate #r'
the &usiness c'&inatin7 the ac8uirer shul! cnsi!er the #ll$in" in!icatrs:
a) Cntinuin" e'pl:'ent) The ter's # cntinuin" e'pl:'ent &: the sellin"
sharehl!ers $h &ec'e Ae: e'pl:ees 'a: &e an in!icatr # the su&stance #
a cntin"ent cnsi!eratin arran"e'ent) The rele4ant ter's # cntinuin"
e'pl:'ent 'a: &e inclu!e! in an e'pl:'ent a"ree'ent7 ac8uisitin
a"ree'ent7 r s'e ther !cu'ent) A cntin"ent cnsi!eratin arran"e'ent in
$hich the pa:'ents are aut'aticall: #r#eite! i# e'pl:'ent ter'inates is
c'pensatin #r pstc'&inatin ser4ices) Arran"e'ents in $hich the
cntin"ent pa:'ents are nt a##ecte! &: e'pl:'ent ter'inatin 'a: in!icate
that the cntin"ent pa:'ents are a!!itinal cnsi!eratin rather than
c'pensatin)
&) Duratin # cntinuin" e'pl:'ent) I# the peri! # re8uire! e'pl:'ent
cinci!es $ith r is ln"er than the cntin"ent pa:'ent peri!7 that #act 'a:
in!icate that the cntin"ent pa:'ents are7 in su&stance7 c'pensatin)
c) Le4el # c'pensatin) Situatins in $hich e'pl:ee c'pensatin ther than
the cntin"ent pa:'ents is at a reasna&le le4el in c'parisn t that # ther
Ae: e'pl:ees in the c'&ine! entit: 'a: in!icate that the cntin"ent pa:'ents
are a!!itinal cnsi!eratin rather than c'pensatin)
!) Incre'ental pa:'ents t e'pl:ees) I# sellin" sharehl!ers $h ! nt &ec'e
e'pl:ees recei4e l$er cntin"ent pa:'ents n a per?share &asis than the
sellin" sharehl!ers $h &ec'e e'pl:ees # the c'&ine! entit:7 that #act 'a:
in!icate that the incre'ental a'unt # cntin"ent pa:'ents t the sellin"
sharehl!ers $h &ec'e e'pl:ees is c'pensatin)
e) Nu'&er # shares $ne!) The relati4e nu'&er # shares $ne! &: the sellin"
sharehl!ers $h re'ain as Ae: e'pl:ees 'a: &e an in!icatr # the su&stance
# the cntin"ent cnsi!eratin arran"e'ent) Fr e@a'ple7 i# the sellin"
sharehl!ers $h $ne! su&stantiall: all # the shares in the ac8uiree cntinue
as Ae: e'pl:ees7 that #act 'a: in!icate that the arran"e'ent is7 in su&stance7 a
pr#it?sharin" arran"e'ent inten!e! t pr4i!e c'pensatin #r
pstc'&inatin ser4ices) Alternati4el:7 i# sellin" sharehl!ers $h cntinue as
Ae: e'pl:ees $ne! nl: a s'all nu'&er # shares # the ac8uiree an! all
sellin" sharehl!ers recei4e the sa'e a'unt # cntin"ent cnsi!eratin n a
per?share &asis7 that #act 'a: in!icate that the cntin"ent pa:'ents are a!!itinal
cnsi!eratin) The preac8uisitin $nership interests hel! &: parties relate! t
sellin" sharehl!ers $h cntinue as Ae: e'pl:ees7 such as #a'il: 'e'&ers7
als shul! &e cnsi!ere!)
#) LinAa"e t the 4aluatin) I# the initial cnsi!eratin trans#erre! at the ac8uisitin
!ate is &ase! n the l$ en! # a ran"e esta&lishe! in the 4aluatin # the
ac8uiree an! the cntin"ent #r'ula relates t that 4aluatin apprach7 that #act
'a: su""est that the cntin"ent pa:'ents are a!!itinal cnsi!eratin)
Alternati4el:7 i# the cntin"ent pa:'ent #r'ula is cnsistent $ith prir pr#it?
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sharin" arran"e'ents7 that #act 'a: su""est that the su&stance # the
arran"e'ent is t pr4i!e c'pensatin)
") Fr'ula #r !eter'inin" cnsi!eratin) The #r'ula use! t !eter'ine the
cntin"ent pa:'ent 'a: &e help#ul in assessin" the su&stance # the
arran"e'ent) Fr e@a'ple7 i# a cntin"ent pa:'ent is !eter'ine! n the &asis #
a 'ultiple # earnin"s7 that 'i"ht su""est that the &li"atin is cntin"ent
cnsi!eratin in the &usiness c'&inatin an! that the #r'ula is inten!e! t
esta&lish r 4eri#: the #air 4alue # the ac8uiree) In cntrast7 a cntin"ent pa:'ent
that is a speci#ie! percenta"e # earnin"s 'i"ht su""est that the &li"atin t
e'pl:ees is a pr#it?sharin" arran"e'ent t c'pensate e'pl:ees #r ser4ices
ren!ere!)
Su""este! ans$er:
Nte: This case $as !esi"ne! t ha4e cn#lictin" in!icatrs acrss the 4arius criteria
i!enti#ie! in the FAS* ASC #r !eter'inin" the issue # c'pensatin 4s) cnsi!eratin)
Thus7 the slutin is su&Eect t alternati4e e@planatins an! stu!ent can &e encura"e!
t use their $n Eu!"'ent an! interpretatins in supprtin" their ans$ers)
In the authr;s Eu!"'ent7 the 60 'illin cntin"ent pa:'ent 3#air 4alue H 6, 'illin5 is
cntin"ent cnsi!eratin t &e inclu!e! in the 4erall #air 4alue Na4iN$ recr!s #r its
ac8uisitin # Tra##icE:e) This cntin"enc: is nt !epen!ent n cntinuin" e'pl:'ent
3criteria a)57 an! uses a #r'ula &ase! n a c'pnent # earnin"s 3criteria ")5) E4en
thu"h the #ur #r'er $ners # Tra##icE:e $ne! (22N # the shares 3criteria e)57
$hich su""ests the 60 'illin is c'pensatin7 the 4erall #act pattern in!icates
cnsi!eratin &ecause n ser4ices are re8uire! #r the pa:'ent)
The pr#it?sharin" c'pnent # the e'pl:'ent cntract appears t &e c'pensatin)
Criteria ") speci#icall: i!enti#ies pr#it?sharin" arran"e'ents as in!icati4e #
c'pensatin #r ser4ices ren!ere!) Criteria a) als applies "i4en that the e'pl:ees
$ul! &e una&le t participate in pr#it?sharin" i# the: ter'inate e'pl:'ent) Althu"h
the e'pl:ees recei4e nn?pr#it sharin" c'pensatin si'ilar t ther e'pl:ees
3criteria c)57 the 4erall pattern # e4i!ence su""ests that an: pa:'ents 'a!e un!er the
pr#it?sharin" arran"e'ent shul! &e rec"niBe! as c'pensatin e@pense $hen
incurre! an! nt cntin"ent cnsi!eratin #r the ac8uisitin)
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ASC RESEARCH CASECDEFENSI=E INTAN9I*LE ASSET 3+- MIN<TES5
a) The ASC 9lssar: !e#ines a !e#ensi4e intan"i&le asset as
OAn ac8uire! intan"i&le asset in a situatin in $hich an entit: !es nt inten! t acti4el:
use the asset &ut inten!s t hl! 3lcA up5 the asset t pre4ent thers #r' &tainin"
access t the asset)P
ASC 022?(2?+-?(2D als &ser4es that
T prtect its c'petiti4e psitin7 r #r ther reasns7 a reprtin" entit: 'a: inten! nt
t use an ac8uire! nn#inancial asset acti4el:7 r it 'a: inten! nt t use the asset
accr!in" t its hi"hest an! &est use) Fr e@a'ple7 that 'i"ht &e the case #r an
ac8uire! intan"i&le asset that the reprtin" entit: plans t use !e#ensi4el: &: pre4entin"
thers #r' usin" it) Ne4ertheless7 the reprtin" entit: shall 'easure the #air 4alue # a
nn#inancial asset assu'in" its hi"hest an! &est use &: 'arAet participants)
Accr!in" t ASC +-2?+2?2-?- a !e#ensi4e intan"i&le asset shul! &e accunte! #r as a
separate unit # accuntin" 3i)e)7 an asset separate #r' ther assets # the ac8uirer5) It
shul! nt &e inclu!e! as part # the cst # an entit:Gs e@istin" intan"i&le asset3s5
presu'a&l: &ecause the !e#ensi4e intan"i&le asset is separatel: i!enti#ia&le)
&) The i!enti#ia&le assets ac8uire! in a &usiness c'&inatin shul! &e 'easure! at
their ac8uisitin?!ate #air 4alues 3ASC 02-?22?+2?(5)
c) A #air 4alue 'easure'ent assu'es the hi"hest an! &est use # an asset &: 'arAet
participants) Hi"hest an! &est use is !eter'ine! &ase! n the use # the asset &: 'arAet
participants7 e4en i# the inten!e! use # the asset &: the reprtin" entit: is !i##erent 3ASC
022?(2?+-?(25) I'prtantl:7 hi"hest an! &est use pr4i!es 'a@i'u' 4alue t 'arAet
participants) The hi"hest an! &est use # the asset esta&lishes the 4aluatin pre'ise use!
t 'easure the #air 4alue # the assetCin this case an in?e@chan"e pre'ise 'a@i'iBes the
4alue # the asset at 62 'illin)
!) A !e#ensi4e intan"i&le asset shall &e assi"ne! a use#ul li#e that re#lects the entit:Gs
cnsu'ptin # the e@pecte! &ene#its relate! t that asset) The &ene#it a reprtin" entit:
recei4es #r' hl!in" a !e#ensi4e intan"i&le asset is the !irect an! in!irect cash #l$s
resultin" #r' the entit: pre4entin" thers #r' realiBin" an: 4alue #r' the intan"i&le
asset 3!e#ensi4el: r ther$ise5) An entit: shall !eter'ine a !e#ensi4e intan"i&le assetGs
use#ul li#e7 that is7 the peri! 4er $hich an entit: cnsu'es the e@pecte! &ene#its # the
asset7 &: esti'atin" the peri! 4er $hich the !e#ensi4e intan"i&le asset $ill !i'inish in
#air 4alue) The peri! 4er $hich a !e#ensi4e intan"i&le asset !i'inishes in #air 4alue is a
pr@: #r the peri! 4er $hich the reprtin" entit: e@pects a !e#ensi4e intan"i&le asset t
cntri&ute !irectl: r in!irectl: t the #uture cash #l$s # the entit:) 3ASC +-2?+2?+-A5
It $ul! &e rare #r a !e#ensi4e intan"i&le asset t ha4e an in!e#inite li#e &ecause the #air
4alue # the !e#ensi4e intan"i&le asset $ill "enerall: !i'inish 4er ti'e as a result # a
lacA # 'arAet e@psure r as a result # c'petiti4e r ther #actrs) A!!itinall:7 i# an
ac8uire! intan"i&le asset 'eets the !e#initin # a !e#ensi4e intan"i&le asset7 it shall nt
&e cnsi!ere! i''e!iatel: a&an!ne!) 3ASC +-2?+2?+-*5
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RESEARCH CASECA**OTT;S AC%<ISITION OF SOL=AK PHARMACE<TICALS
32- Minutes5
() Fr' A&&tt;s 22(2 (2?Q reprt 3Nte (257 OThe ac8uisitin # Sl4a: Phar'aceuticals
pr4i!es A&&tt $ith a lar"e an! c'ple'entar: prt#li # phar'aceutical pr!ucts
an! e@pan!s A&&ttGs presence in Ae: "l&al e'er"in" 'arAets)P
2) A&&tt accunte! #r its Fe&ruar: (-7 22(2 ac8uisitin # Sl4a: Phar'aceuticals
usin" the ac8uisitin 'eth!) Accr!in"l: A&&tt recr!e! the ac8uisitin at 6.), &illin)

+) Fr' A&&tt;s (2D+(D(2 (2?Q reprt 3!llars in 'illins5
Cash cnsi!eratin:
Cnsi!eratin trans#erre! 3inclu!in" 62)+ cntin"ent cnsi!eratin5 6.),
Ac8uire! intan"i&le assets7 nn?!e!ucti&le 6 ,)(
Ac8uire! in?prcess research an! !e4elp'ent 2)-
Ac8uire! net tan"i&le assets 2)/
De#erre! inc'e ta@es recr!e! at ac8uisitin 3( )(5
Ttal #air 4alue # net i!enti#ia&le assets , )2
9!$ill 62 )2

A&&tt !eter'ine! these allcatins &: esti'atin" #air 4alues #r each # the assets
ac8uire! an! the lia&ilities assu'e!)
,) As sh$n in the part 2) Sche!ule a&4e7 A&&tt inclu!e! 621- 'illin # #air 4alue
cntin"ent cnsi!eratin in its cnsi!eratin trans#erre!
-) Ac8uire! in?prcess research an! !e4elp'ent is accunte! #r as an intan"i&le
asset $ith an in!e#inite li#e)
.) A&&tt allcate! current :ear e@penses appr@i'atel: 6+1- 'illin # ac8uisitin
relate! e@penses7 pre?ta@ lsses7 inte"ratin an! restructurin" e@penses)
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FAS* CODIFICATION RESEARCH CASE: THE DOI CHEMICAL COMPANK;S AC%<IRED
CONTIN9ENCIES 3Esti'ate! Ti'e: (hur5
() Di! D$ Che'ical rec"niBe an: ac8uire! cntin"encies #r its ac8uisitin # Rh'
an! HaasR I# it !i!7 h$ $ere the: 'easure!R I# nt7 $h: ntR
Slutin: D$ Che'ical rec"niBe! certain cntin"ent en4irn'ental lia&ilities #
6(-1 'illin an! a lia&ilit: # 6(0- 'illin relate! t Rh' an! Haas Pensin Plan
'atters7 $hich $ere 4alue! in accr!ance $ith SFAS N) -7 OAccuntin" #r
Cntin"encies)P
2) <n!er $hat circu'stances shul! a #ir' rec"niBe an asset ac8uire! r a lia&ilit:
assu'e! in a &usiness c'&inatin that arises #r' a cntin"enc:R
Slutin: Accr!in" t FAS* ASC7 an asset ac8uire! r a lia&ilit: assu'e! in a
&usiness c'&inatin that arises #r' a cntin"enc: nee!s t &e rec"niBe! i# the
ac8uisitin?!ate #air 4alue is !eter'ina&le r i# the cntin"enc: is &th pr&a&le an!
esti'a&le at the ac8uisitin !ate)
FAS* ASC:
An ac8uirer shall rec"niBe at #air 4alue7 at the ac8uisitin !ate7 an asset ac8uire!
r a lia&ilit: assu'e! in a &usiness c'&inatin that arises #r' a cntin"enc: i#
the ac8uisitin?!ate #air 4alue # that asset r lia&ilit: can &e !eter'ine! !urin"
the 'easure'ent peri!) FAS* ASC 02-?22?2-?(17 02-?22?+2?1)
I# the ac8uisitin?!ate #air 4alue # an asset ac8uire! r a lia&ilit: assu'e! in a
&usiness c'&inatin that arises #r' a cntin"enc: cannt &e !eter'ine!
!urin" the 'easure'ent peri!7 an asset r a lia&ilit: shall &e rec"niBe! at the
ac8uisitin !ate i# &th # the #ll$in" criteria are 'et:
a) In#r'atin a4aila&le &e#re the en! # the 'easure'ent peri! in!icates
that it is pr&a&le that an asset e@iste! r that a lia&ilit: ha! &een incurre!
at the ac8uisitin !ate)
&) The a'unt # the asset r lia&ilit: can &e reasna&l: esti'ate!)
3FAS* ASC 02-?22?2-?227 02-?22?+2?2+7 02-?22?2-?22A5
I# neither the criterin in para"raph / nr the criteria in para"raph 0 are 'et at the
ac8uisitin !ate usin" in#r'atin that is a4aila&le !urin" the 'easure'ent
peri! a&ut #acts an! circu'stances that e@iste! as # the ac8uisitin !ate7 the
ac8uirer shall nt rec"niBe an asset r lia&ilit: as # the ac8uisitin !ateS)
3FAS* ASC 02-?22?2-?22*5
+) H$ shul! D$ Che'ical accunt #r its ac8uire! cntin"encies in peri!s a#ter the
ac8uisitin !ateR
Slutin: In peri!s a#ter the ac8uisitin !ate7 D$ Che'ical shul! !e4elp a
s:ste'atic an! ratinal &asis #r su&se8uentl: 'easurin" an! accuntin" #r these
cntin"encies)
An ac8uirer shall !e4elp a s:ste'atic an! ratinal &asis #r su&se8uentl: 'easurin"
an! accuntin" #r assets an! lia&ilities arisin" #r' cntin"encies !epen!in" n
their nature) 3FAS* ASC 02-?22?+-?+5
,) Ihat is the !isclsure re8uire'ent #r D$ Che'ical;s ac8uire! cntin"enciesR
Slutin: D$ Che'ical shul! !isclse the a'unts rec"niBe! at the ac8uisitin
2013 by McGraw-Hill Education. This is proprietary material solely or authori!ed instructor use. "ot authori!ed or sale or distribution in any
manner. This document may not be copied# scanned# duplicated# orwarded# distributed# or posted on a website# in whole or part.
!ate an! the 'easure'ent &asis applie!7 an! als the nature # the cntin"encies)
An ac8uirer shall !isclse in#r'atin that ena&les users # its #inancial state'ents t
e4aluate the nature an! #inancial e##ects # a &usiness c'&inatin that ccurs either
!urin" the current reprtin" peri! r a#ter the reprtin" peri! &ut &e#re the
#inancial state'ents are issue!)
Fr each &usiness c'&inatin that ccurs !urin" the reprtin" peri!7 an ac8uirer
shall !isclse the #ll$in" in the #tnte that !escri&es the &usiness c'&inatin:
Fr assets an! lia&ilities arisin" #r' cntin"encies rec"niBe! at the ac8uisitin
!ate:
3(5 The a'unts rec"niBe! at the ac8uisitin !ate an! the 'easure'ent &asis
applie!Cusuall: #air 4alue)
325 The nature # the cntin"encies) An ac8uirer 'a: a""re"ate !isclsures #r
assets r lia&ilities arisin" #r' cntin"encies that are si'ilar in nature)
3FAS* ASC 02-?22?-2?(5
%. Ihat are s'e ptential cncerns $ith authritati4e accuntin" literature #r
ac8uire! cntin"enciesR
Slutin: There is cncern that these stan!ar!s 'a: nt &e peratinal:
The FAS* ASC !es nt pr4i!e "ui!ance n h$ t 'aAe the !eter'inatin
assess'ent # the ac8uisitin !ate #air 4alue # an asset ac8uire! r a lia&ilit:
assu'e! in a &usiness c'&inatin that arises #r' a cntin"enc:)
In a!!itin7 the FAS* ASC !es nt prescri&e in !etail h$ an asset r a lia&ilit:
arisin" #r' a cntin"enc: initiall: rec"niBe! at #air 4alue in a &usiness c'&inatin
$ul! &e 'easure! su&se8uent t its initial rec"nitin) 3I!eas e@tracte! #r' FSP
FAS (,(3R5?( !issent &: T' Lins'eier5)
2013 by McGraw-Hill Education. This is proprietary material solely or authori!ed instructor use. "ot authori!ed or sale or distribution in any
manner. This document may not be copied# scanned# duplicated# orwarded# distributed# or posted on a website# in whole or part.