Week 2 Assessment: 

Accounting for Business Combinations

Tamara Payne

ACC442_1_20161212M_OL_Advanced Accounting I

Jan. 07, 2017

Independence University

Instructor Dr. Robyn Swinehart

P 2-2 Merger and Consolidation, Goodwill Impairment Balance sheets and the fair values of

each company’s assets on October 1, 2014, were as follows:

Acme Baltic Colt

Assets $3,900,000 $7,500,000 $ 950,000

Liabilities $2,030,000 $2,200,000 $ 260,000

Common stock, $20 par value 2,000,000 1,800,000 540,000

Other contributed capital —0— 600,000 190,000

Retained earnings (deficit) (130,000) 2,900,000 (40,000)

Total equities $3,900,000 $7,500,000 $ 950,000

Fair values of assets $4,200,000 $9,000,000 $1,300,000

Acme Company shares have a fair value of $50. A fair (market) price is not available for shares

of the other companies because they are closely held. Fair values of liabilities equal book values.

Part A. Prepare a balance sheet for the business combination. Assume the following: Acme

Company acquires all the assets and assumes all the liabilities of Baltic and Colt Companies by

issuing in exchange 140,000 shares of its common stock to Baltic Company and 40,000 shares of

its common stock to Colt Company.

Price paid = ((140+40) x $50) = $9,000

Fair value of net assets acquired:

Fair value of assets of Baltic and Colt $10,300

Less liabilities assumed 2,460

F. V. of net assets 7,840

Goodwill $1,160

Acme Company

Balance Sheet

Assets (except goodwill) ($3,900+$9,000+$1,300) $14,200

Goodwill 1,160

Total Assets $15,360

Liabilities ($2,030+$2,200+$260) $4,490

Common Stock (180 X $20) + $2,000 5,600

Other Contributed Capital (180 X ($50 - $20)) 5,400

Retained Earnings (130)

Total Liabilities and Equity $15,360

Part B. Assume, further, that the acquisition was consummated on October 1, 2014, as

described above. However, by the end of 2015, Acme was concerned that the fair values of one

or both of the acquired units had deteriorated. To test for impairment, Acme decided to measure

goodwill impairment using the present value of future cash flows to estimate the fair value of the

reporting units (Baltic and Colt). Acme accumulated the following data:

Carrying Value of Fair Value

Year Present Value Identifiable Identifiable

2015 of Future Cash Flows Net Assets* Net Assets

Baltic $6,500,000 $6,340,000 $6,350,000

Colt $1,900,000 1,200,000 1,000,000

* Identifiable Net Assets do not include goodwill. Prepare the journal entry, if needed, to record

goodwill impairment at December 31, 2015.

Baltic

2014: Step 1: Fair value of the reporting unit $6,500,000

Carrying value of unit:

Carrying value of identifiable net assets 6,340,000

Carrying value of goodwill *200,000

 Total carrying value 6,540,000

*[(140,000 X $50) – ($9,000,000 - $2,200,000)]. The excess of carrying value over fair value

means that step 2 is required.

Step 2: Fair value of the reporting unit $6,500,000

Fair value of identifiable net assets 6,350,000

Implied value of goodwill 150,000

Recorded value of goodwill 200,000

Impairment loss 50,000

(Because $150,000 < $200,000)

Colt

2014: Step 1: Fair value of reporting unit $1,900,000

Carrying value of unit:

Carrying value of identifiable net assets $1,200,000

Carrying value of goodwill *960,000

Total carrying value 2,160,000

*[(40,000 X $50) – ($1,300,000 - $260,000)]

The excess of carrying value over fair value means that step 2 is required.

Step 2: Fair value of the reporting unit $1,900,000

Fair value of identifiable net assets 1,000,000

Implied value of goodwill 900,000

Recorded value of goodwill 960,000

Impairment loss $60,000

(Because $900,000 < $960,000)

P 2-3. Purchase of Net Assets Using Bonds. On January 1, 2014, Perez Company acquired all

the assets and assumed all the liabilities of Stalton Company and merged Stalton into Perez. In

exchange for the net assets of Stalton, Perez gave its bonds payable with a maturity value of

$600,000, a stated interest rate of 10%, interest payable semiannually on June 30 and December

31, a maturity date of January 1, 2024, and a yield rate of 12%.

The Balance sheets for Perez and Stalton (as well as fair value data) on January 1, 2014, were as

follows:

Perez Stalton

Book Value Book Value Fair Value

Cash $ 250,000 $114,000 $114,000

Receivables 352,700 150,000 135,000

Inventories 848,300 232,000 310,000

Land 700,000 100,000 315,000

Buildings 950,000 410,000 54,900

Accumulated depreciation—buildings (325,000) (170,500)

Equipment 262,750 136,450 39,450

Accumulated depreciation—equipment (70,050) (90,450) 0

Total assets $2,968,700 $881,500 $968,350

Current liabilities $ 292,700 $ 95,300 $ 95,300

Bonds payable, 8% due 1/1/2019, Interest

payable 6/30 and 12/31 300,000 260,000

Common stock, $15 par value 1,200,000

Common stock, $5 par value 236,500

Other contributed capital 950,000 170,000

Retained earnings 526,000 79,700 _______

Total equities $2,968,700 $881,500 $ 355,300

Required: Prepare the journal entry on the books of Perez Company to record the acquisition of

Stalton Company’s assets and liabilities in exchange for the bonds.

Step 1: Calculate the fair value of consideration given by Perez to Stalton (Bonds Payable).

Compute the present value of the future payments to be received by former Shelton shareholders

from the bonds.

Effective Semi-Annual Rate 6.00%

Nominal Value Present Value

Face Bonds – Present Value 600,000 x 0.311805 187,083

Interest Payment – Present Value 30,000 x 11.46993 344,098

Total Present Value 531,180

Less: Face Value Bonds 600,000

(Discount/Premium on Bonds (63,820)

Step 2: Calculate the fair value of Perez’s net assets and prepare a CAD Schedule.

Fair Value Purchase Price 531,180

Cash 114,000 Less: Fair Value of Net Assets 613,050

Receivable 135,000 Difference (discount to be allocated) (81,870)

Inventor 310,000

Land 315,000

Building 54,900

Equipment (Net) 39,450

Current Liability (95,300)

Bond Payable (260,000)

Fair Value of

Net Assets 613,050

Step 3: Allocate the discount calculation in step two to the target firm’s long-term assets on a

pro-rate basis (percentage of fair value).

Fair Value % of Total FV Allocated Difference

Land 315,000 76.95% (63,000)

Buildings 54,900 13.41% (10,980)

Equipment 39,450 9.64% (7,890)

409,350 100.00% (81,870)

Part 4: Record the entry by Perez to record the acquisition. Ensure that assets/liabilities acquired

are recorded at fair value less any allocated discounts

Debit Credit

Cash 114,000

Receivables 135,000

Inventory 310,000

Land 252,000

Buildings 43,920

Equipment (Net) 31,560

Bond Discount – Old 40,000

Bond Discount – New 68,820

Current Liabilities 95,300

Bond Payable Stalton 300,000

Bond Payable Perez 600,000