Assignment 1

Part A
(i) The net assets of the acquiree are to be measured at their fair value on the acquisition date. In contrast, the
carrying amounts of the net assets of the acquirer are not affected by a business combination. Therefore, the
acquirer and the acquiree must be accurately identified in accounting for a business combination.
(ii) (43,000 $17) + $1,500 = $732,500 = FVNIA
Legal fees and stock issuance cost are not relevant in the determination of goodwill/gain from bargain purchase.
(iii) The expected payment is computed as follows:
(230,000 200,000) $0.25 35% = $ 2,625
(270,000 200,000) $0.25 30% = $ 5,250
(300,000 200,000) $0.25 15% = 3,750
$11,625
The payment takes place at the end of the second year, so the present value is $11,625 / (1 + 0.04)2 = $10,748
The estimated fair value of the contingent consideration is $10,748.
(iv) Fair value of net identifiable assets of Scott = 37,000 + 3,200 + 2,000 = 42,200
Favorable press reports do not meet the criteria for separate recognition.
Goodwill = (52,000 + 15,000) 42,200 = 24,800
ALLOCATION OF GOODWILL
Goodwill to controlling interest
Consideration transferred
Less controlling interest in the fair value of Scotts net identifiable assets:
70% $42,200
Controlling interests share (90.6%)
Goodwill to noncontrolling interest
Total goodwill
Less goodwill to controlling interest
Noncontrolling interest's share (9.4%)
^
Alternatively: $15,000 30% $42,200

$ 52,000
(29,540)
$ 22,460

24,800
(22,460)
$
2,340^

Part B
(i)
Working paper entry on January 1, 2014:
D
Common Stock
138,000
Retained Earnings
52,000
Building
18,000
Goodwill
170,100
Investment in Sunny
225,000
Noncontrolling Interest
150,000
Inventories
1,800
Long-term debt
1,300
Fair value of net identifiable assets of Sunny = (17,000 + 33,200 + 278,000) (72,000 + 51,300) = 204,900 [or
(138,000 + 52,000) 1,800 + 18,000 1,300 = 204,900]
Goodwill = (225,000 + 150,000) 204,900 = 170,100
(ii)
Working paper for consolidated balance sheet on date of business combination, January 1, 2014
Adjustments & Eliminations
Perfect
Cash

Sunny

80,000

17,000

Inventories

260,000

35,000

Investment in Sunny

225,000

Building (net)

760,000

Credits

Consolidated
97,000

1,800

293,200

225,000
260,000

Goodwill
Total

Debits

18,000

1,038,000

170,100

170,100

1,325,000

312,000

1,598,300

180,000

72,000

252,000

Long-term debt

20,000

50,000

Common stock

350,000

138,000

Add. paid-in capital

620,000

Retained earnings

155,000

Accounts payable

138,000

350,000

52,000

52,000

155,000
150,000

1,325,000

71,300

620,000

Noncontrolling interest
Total

1,300

312,000

150,000
1,598,300