Exam 3: Business Combinations

Hurricane Inc. wants to acquire 100% of the net assets of Flood Inc. using all cash consideration. From Flood's shareholders' point of view, what are the advantages and disadvantages of Hurricane purchasing shares rather than net assets of Flood?

On December 31, 20X5, CI Co. purchased 100% of the outstanding common shares of SA Ltd. for $1,100,000 in cash; 80% of the cash was obtained by issuing a five-year note payable. The statements of financial position of CI and SA immediately before the acquisition and issuance of the notes payable were as follows (in 000s): $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { CI } \quad \quad \quad \quad \quad \quad\text { SA }$ Book Fair Book Fair Value Value Value Value Cash \ 360 \ 360 \ 200 \ 200 Accounts receivable 520 500 380 380 Inventory 800 880 400 450 Property, plant, and equipment 2,000 1,520 \ 3,500 \ 2,400 Current liabilities \ 380 \ 380 \ 260 \ 260 Long-term liabilities 1,200 1,200 1000 1030 Common shares 500 600 Retained earnings \ 3,500 \ 2.400 Required: Prepare the journal entry that CI will post to record the acquisition of SA. Prepare the consolidated statement of financial position for CI immediately following the acquisition of SA.

Able Ltd. offers to buy shares from the existing shareholders of Wei Co. at a premium price. The current management and board of directors of Wei have let the Wei shareholders know that they do not approve of this. This is an example of a(n)________.

Nashman Ltd. is a private enterprise with five subsidiaries. Which of the following statements is true?

Under IFRS 3, Business Combinations, which method must be used to account for business combinations?

Which of the following statements is not true about revaluation accounting?

Perez Co. acquired Roo Co. in a business combination. Roo issued new shares to Perez's shareholders in exchange for their outstanding shares. What type of share exchange is this?

Which of the following is not a reason why a private enterprise may be acquired as a bargain purchase?

Cheers Co Tapp Ltd Book Value Book Value Current assets \ 512,000 \ 62,400 \ 65,600 Net capital assets \ \ Current liabilities \ 96,000 \ 12,800 12,800 Long-term debt 288,000 35,200 40,000 Share capital 320,000 64,000 Retained earnings \ \ Cheers acquired 100% of Tapp's shares for $144,000. The condensed statements of financial position for Cheers and Tapp are given above, as well as the fair values of Tapp's assets and liabilities on the acquisition date. What is the amount of the goodwill on the acquisition?

What type of business combination is accounted for in a manner that is essentially the same as the pooling-of-interests method?

Sya Ltd. acquired all the assets and liabilities of Littman Ltd. by issuing common shares to Littman. After this transaction, Littman owned 30% of Sya's outstanding shares. Which of the following statements is true?

How should accounting fees for an acquisition be treated?

On December 31, 20X6, the statements of financial position of the Power Company and the Pro Company are as follows: (in 000s) Power Pro (FV) Cash \ 500 \ 800 Accounts receivable 1,500 1,700 Inventories 2,000 1,500 Property, plant, and equipment (net) \4 ,300 Total assets Current liabilities \ 700 \ 400 Long-term liabilities 800 500 Common shares 2,500 1,000 Contributed surplus 800 1,500 Retained earnings Total liabilities and equities Power Company has 100,000 shares of common stock outstanding. Pro Company has 45,000 shares outstanding. On January 1, 20X7, Power issued an additional 90,000 shares of common stock in exchange for all the outstanding shares of Pro. All assets and liabilities have book values equal to fair values, except as noted above. In addition, Pro has a patent that has an appraised fair value of $450. Market value of the new shares issued was $95 per share at the date of acquisition. $\text {Required: }$ What is the amount of goodwill to be recorded for this business combination? Prepare the journal entry that Power would record on January 1, 20X7, related to this acquisition. Prepare the consolidated statement of financial position at January 1, 20X7.

What is the most common valuation method used for intangible assets?

Ski Ltd. has 500,000 shares outstanding. On July 1, 20X7, Ski purchased all of the outstanding shares of Snow Ltd. The consideration paid by Ski was in the form of 500,000 shares, valued at $20 per share, which was premium of 10% over the market value prior to the announcement. It has been decided that the CEO of the combined company will come from Ski, but the CFO and the COO will come from Snow. The chairman of the board of directors will come from Snow. The board will have six other directors, three from Ski and three from Snow. Required: Define what the acquirer is in a business combination. How would you identify the acquirer in the above transaction?

How is negative goodwill treated in accounting for a joint venture in the year of acquisition?

Explain how a business combination could occur with no transfer of consideration. Using the two scenarios below, explain how PCo could gain control of SCo with no transfer of consideration. Scenario 1: SCo currently has 1,000,000 common shares outstanding, and PCo owns 300,000. Scenario 2: SCo currently has 1,000,000 common shares outstanding. Although PCo owns 510,000 of these shares, PCo is unable to exert control due to regulatory restrictions.

Sya Ltd. acquired all the assets and liabilities of Littman Ltd. by issuing common shares to Littman. After this transaction, Littman owned 30% of Sya's outstanding shares. Which of the following statements is true?

On December 31, 20X6, the statements of financial position of the Power Company and the Pro Company are as follows: (in 000s) Power Pro (FV) Cash \ 500 \ 800 Accounts receivable 1,500 1,700 Inventories 2,000 1,500 Property, plant, and equipment (net) \4 ,300 Total assets Current liabilities \ 700 \ 400 Long-term liabilities 800 500 \5 50 Common shares 2,500 1,000 Contributed suplus 800 1,500 Retained earnings Total equities Power Company has 100,000 shares of common stock outstanding. Pro Company has 45,000 shares outstanding. On January 1, 20X7, Power issued an additional 90,000 shares of common stock in exchange for all the net assets of Pro. All assets and liabilities have book value equal to fair values, except as noted. In addition, Pro has a patent that has an appraised fair value of $450. Market value of the new shares issued was $95 per share at the date of acquisition. Required: A)What is the amount of goodwill to be recorded for this business combination? Prepare the journal entry that Power would record on January 1, 20X7, related to this acquisition. In this case, who are the shareholders, and what are their percentage holdings on January 1, 20X7? Prepare the statement of financial position for Power as at January 1, 20X7. B)How would your answer differ if Power had purchased the shares rather than the net assets of Pro Company? In this case, who are the shareholders and what are their percentage holdings on January 1, 20X7?

Sya Ltd. acquired all the assets and liabilities of Littman Ltd. by issuing common shares to Littman. After this transaction, Littman owned 30% of Sya's outstanding shares. How should Sya record Littman's assets and liabilities on its books?