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Module 2 Handout 2 Business Com

This document provides an example of a 100% stock acquisition where the price paid equals the fair market value of the acquired company's net assets. It shows: 1) Company P acquired 100% of Company S for $500,000, which equals the fair value of Company S's identifiable net assets. 2) An investment account is recorded for the $500,000 price, and equity accounts are adjusted. 3) No goodwill or gain is recorded because price equals fair value of net assets. 4) Eliminating entries are made to remove the acquired equity accounts from the balance sheet.

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Rosemarie Alcantara
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37 views3 pages

Module 2 Handout 2 Business Com

This document provides an example of a 100% stock acquisition where the price paid equals the fair market value of the acquired company's net assets. It shows: 1) Company P acquired 100% of Company S for $500,000, which equals the fair value of Company S's identifiable net assets. 2) An investment account is recorded for the $500,000 price, and equity accounts are adjusted. 3) No goodwill or gain is recorded because price equals fair value of net assets. 4) Eliminating entries are made to remove the acquired equity accounts from the balance sheet.

Uploaded by

Rosemarie Alcantara
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Module 2 – Handout 2

100% Acquisition: Price = FMV

Example
Assume that Company P acquired 100% of the
stock of Company S for $500,000.
Company S Balance Sheet
Assets Liabilities & Equity
Accounts receivable $200,000 Current liabilities $100,000
Inventory 100,000 Common stock 200,000
Equipment (net) 300,000 Retained earnings 300,000
Total assets $600,000 Total liabilities & equity $600,000

Fair market value of S’s identifiable net assets


equaled book value.
2

Record Investment
Investment in S 500,000
Cash 500,000

1
Value Analysis
• Designed to compare the fair value of the
company acquired with the fair value of
the net assets.
Company Parent NCI
Value Analysis Schedule Implied Value Price (100%) Value (0%)

Company fair value $500,000 $500,000 NA

Fair value of net assets excluding G/W 500,000 500,000


Goodwill/(Gain on acquisition) $ 0 $ 0

Determination and Distribution of


Excess Schedule
Company Parent NCI
Implied Value Price (100%) Value (0%)

Fair value of subsidiary $500,000 $500,000 NA


Less book value of interest acquired
Common stock $200,000 $200,000
Retained earnings 300,000 300,000
Total stockholders’ equity $500,000 $500,000
Interest acquired – 100% 100%
Book value $500,000
Excess fair value over book value $ 0

Elimination Entries
Parent’s investment in subsidiary account is
eliminated against the equity accounts of the
subsidiary.
(1) Common stock‐S 200,000
Retained earnings‐S 300,000
Investment in S 500,000

2
Company P’s Balance Sheet
Assume that immediately after the acquisition,
Company P had the following balance sheet:
Company P Balance Sheet
Assets Liabilities & Equity
Cash $300,000 Current liabilities $150,000
Accounts receivable 300,000 Bonds payable 500,000
Inventory 100,000 Common stock 100,000
Investment in S 500,000 Retained earnings 600,000
Equipment (net) 150,000
Total assets $1,350,000 $1,350,000

Worksheet
P S DR CR Con B/S
Cash 300,000 300,000
A/R 300,000 200,000 500,000
Inventory 100,000 100,000 200,000
Invest in S 500,000 (1) 500,000 0
Equip (net) 150,000 300,000 450,000
C/L (150,000) (100,000) (250,000)
B/P (500,000) (500,000)
C/S‐P (100,000) (100,000)
C/S‐S (200,000) (1) 200,000 0
R/E‐P (600,000) (600,000)
R/E‐S (300,000) (1) 300,000 0
Total 0 0 500,000 500,000 0
8

What’s Next
• Topic 3 – 100% acquisition: Price > FMV
• Topic 4 – 100% acquisition: Price < FMV
• Topic 5 – Less than 100% acquisition

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