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ACCT4010 Business Combination Revision

The document contains 3 multiple choice questions related to accounting for business combinations. Question 1 asks about recording assets and liabilities in a business combination, with the correct answer being that identifiable assets and liabilities are recorded at fair value at the date of acquisition. Question 2 asks about determining which company should prepare consolidated financial statements after a share exchange, with the answer being the company that obtains control of the other as determined by share ownership percentages after the exchange. Question 3 provides balance sheet information for 2 companies, Peris and Shanta, and asks the consolidated balances that would be presented after their combination, with the response calculating the resulting consolidated balances for several accounts.

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281 views3 pages

ACCT4010 Business Combination Revision

The document contains 3 multiple choice questions related to accounting for business combinations. Question 1 asks about recording assets and liabilities in a business combination, with the correct answer being that identifiable assets and liabilities are recorded at fair value at the date of acquisition. Question 2 asks about determining which company should prepare consolidated financial statements after a share exchange, with the answer being the company that obtains control of the other as determined by share ownership percentages after the exchange. Question 3 provides balance sheet information for 2 companies, Peris and Shanta, and asks the consolidated balances that would be presented after their combination, with the response calculating the resulting consolidated balances for several accounts.

Uploaded by

marychan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ACCT4010 Revision 2/11/2018

Question 1
In a business combination, which of the following will occur?

A) All identifiable assets and liabilities are recorded at fair value at the date of acquisition.

B) All identifiable assets and liabilities are recorded at book value at the date of acquisition.

C) Goodwill is recorded if the fair value of the net assets acquired exceeds the book value of
the net assets acquired.

D) None of the above is correct.

Question 2
Use the following information to answer the question below:

Janaca Corporation Lilypad Corporation


Number of Shares Outstanding 1000 400
Fair Value $5 $20

A business combination occurs between Jacana Corporation and Lilypad Corporation. On


January 1 2017, Lilypad issues five new shares in exchange for one share of Lilypad.

After entering into an agreement to the share exchange, identify which entity should prepare
the consolidated financial statements.
ACCT4010 Revision 2/11/2018

Question 3
On December 31, 2013, Peris Company acquired Shanta Company's outstanding stock by
paying $400,000 cash and issuing 10,000 shares of its own $30 par value common stock, when
the market price was $32 per share. Peris paid legal and accounting fees amounting to $35,000
in addition to stock issuance costs of $8,000. Shanta is dissolved on the date of the acquisition.
Balance sheet information for Peris and Shanta immediately preceding the acquisition is shown
below, including fair values for Shanta's assets and liabilities.

Peris Shanta Shanta


Book Value Book Value Fair Value
Cash $490,000 $140,000 $140,000
Accounts Receivable 560,000 280,000 280,000
Inventory 520,000 200,000 260,000
Land 460,000 150,000 140,000
Plan Assets – Net 980,000 325,000 355,000
Construction Permits 380,000 170,000 190,000
Accounts Payable (460,000) (140,000) (140,000)
Other accrued expenses (160,000) (45,000) (45,000)
Notes Payable (800,000) (460,000) (460,000)
Common Stock ($30 par) (960,000)
Common Stock ($20 par) (200,000)
Additional P.I.C (192,000) (80,000)
Retained Earnings (818,000) (340,000)

Determine the consolidated balances which Peris would present on their consolidated balance
sheet for the following accounts.
Cash
Inventory
Construction Permits
Goodwill
Notes Payable
Common Stock
Additional Paid in Capital
Retained Earnings
ACCT4010 Revision 2/11/2018

Q1) A

Q2) Control exists when an investor is exposed or has rights to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over
the investee (IFRS 10). Control can be achieved by acquiring the net assets of the investee or
acquiring sufficient shares to obtain a controlling interest over the investee.

The criterion for consolidation is control. Hence, Jacana issues 5 shares in exchange for one
share of Lilypad, and because this is a business combination, the acquirer obtains control of
the other business.

After combination, Jacana has 1000 + 400 × 5 = 3000 shares issued and outstanding

This shows that former shareholders of Lilypad actually holds 2000 / 3000 = 66.67% of shares
in Jacana. This means that this is a reverse acquisition, which means Lilypad has actually taken
over Jacana because the former shareholders of Lilypad are in control. Hence, because Lilypad
is in control, Lilypad should prepare the consolidated financial statements after the business
combination, as it is now the parent of Jacana.

Q3) Cash = $490,000 + $140,000 - $400,000 - $35,000 - $8,000 = $187,000


Inventory = $520,000 + $260,000 = $780,000
Construction Permits = $380,000 + $190,000 = $570,000
Goodwill = $720,000 (Paid $400,000 + $320,000) - $720,000 (Fair Value of Net Assets) = 0
Notes Payable = $800,000 + $460,000 = $1,260,000
Common Stock = $960,000 + $300,000 (10,000 × $30 par) = $1,260,000 Additional Paid in
Capital = $192,000 + $20,000 (10,000 shares issued × $2 excess over par per share) - $8,000
(cost of issuance) = $204,000
Retained Earnings = $818,000 - $35,000 (investment expense) = $783,000

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