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Dr. M. D.

Chase
Advanced Accounting-219

Pooling Examples: Date of Acquisition

Long Beach State University


Page 1

I. POOLING EXAMPLE: DATE OF ACQUISITION


The following examples reflect several important applications of Pooling of interests
EXAMPLE 1: Issues Illustrated:
-Computing the number of shares to be issued and the exchange ratio.
-Comparing par value issued to total PIC received
-recording the pooling on the books of the issuer
-recording the pooling on the books of the combiner

Consider the following facts: The Issuer and Combiner Corporations have agreed to merge in a transaction which will qualify as a
pooling of interests. Issuer Corporation will issue the required number of previously unissued shares of $5 par common stock in
exchange for all of the net assets of the Combiner Corporation. The number of shares issued will be based on the assumed
market value of $48 per share of Issuer common stock and on the fair market value of the Combiner Corporation.

Immediately prior to the pooling, the Combiner Corporation prepared the following summarized balance sheet:
Combiner Corporation
Balance Sheet
December 31, 19x1
Current assets........................
$ 450,000
Current liabilities................. $
100,000
Property, plant and equipment ........ 2,000,000
Bonds payable.......................
800,000
Accumulated depreciation..............
(500,000)
Common stock, $10 par.......... 250,000
Retained earnings................... 950,000
Goodwill..............................
150,000
Total liabilities............... $
2,100,000
Total assets.....................
$2,100,000

$1,200,000

Current assets and liabilities are recorded at amounts approximating their market values. The following appraisals have been made:
Property, plant, and equipment......................... $
1,550,000
Note that these amounts would be arrived at by negotiation
Goodwill...............................................
200,000
and/or appraisal.
Bonds payable..........................................
780,000

In consummating the transaction, the Issuer Corporation spent $5,000 for direct acquisition costs and $15,000 for
the shares of stock used to acquire the Combiner Corporation.

REQUIRED:
1. Determine the number of shares of stock the Issuer Corporation will issue.
2. Determine the exchange ratio
3. Record the pooling of interests on the books of the Issuer Corporation.
4. What entry would Combiner Corporation make to record the receipt of the shares and their distribution to
shareholders in order to liquidate the corporation?

registering and issuing

Dr. M. D. Chase
Advanced Accounting-219

Long Beach State University


Page 2

Pooling Examples: Date of Acquisition

EXAMPLE 1--Solution
1. Determine the number of shares of stock the Issuer Corporation will issue.
--Market value of net assets acquired:
FMV
Current assets.............................. $ 450,000
Property, plant, and equipment.......
1,550,000
Goodwill*.....................................
200,000
Current liabilities..........................
(100,000)
Bonds payable................................
(780,000)
Net market value........................
$ 1,320,000

Note that this is pre-existing goodwill; recall that


goodwill cannot be created in a pooling.

--Market value of shares to be issued in exchange of net assets = $48 share


--Number of shares to be issued: $1,320,000/$48 = 27,500 shares

NOTE: MARKET VALUES ARE USED TO COMPUTE THE NUMBER OF SHARES TO EXCHANGE, BUT NOT TO RECORD ASSET
VALUES IN A POOLING
2. Determine the exchange ratio.
--shares received/shares issued = 27,500 (see computation above);
--exchange ratio = shares received/shares issued = ($250,000/$10 par)/ 27,500 shares;
-- 1 share received to 1.1 share issued;
-- exchange ratio = 1:1.1

The process of Analyzing the Investment in a pooling is completely different from the process of analyzing a purchase investment. In a pooling,
because no purchase is taking place, the analysis consist of comparing the amount of par issued to the value of common stock (C/S) and paid in
capital in excess of par on the common stock (PIC-C/S) received. The total value received will be referred to as PIC (i.e. the total paid in capital
received; the sum of C/S and PIC-C/S). This procedure is outlined below.

3. Record the pooling of interests on the books of Issuer Corporation.


--Step 1: analyze the pooling to determine the makeup of total PIC received
Par issued: $5 par x 27,500 shares .............................
$
137,500
Total PIC received:
Common stock..... $
250,000
$
250,000
PIC..............
-0Par issued < PIC received, therefore allocate to issuer PIC...... $
112,500
--Step 2: Record the pooling on Issuer books
Current assets...................................................................
450,000
Property, plant, and equipment .................................................. 2,000,000
Goodwill.........................................................................
150,000
Accumulated depreciation....................................................
500,000
Current liabilities.........................................................
100,000
Bonds payable...............................................................
800,000
Common stock ($5 x 27,500 shares)..................................
137,500
PIC.........................................................................
112,500
Retained earnings (carried over intact because par issued < PIC received)950,000
To record net assets acquired in a pooling of interest with Combiner Corporation

Expense..........................................................................
20,000
Cash........................................................................
To record payment of $5,000 direct acquisition costs and $15,000 for
registering and issuing the stock issued to pool with Combiner Corporation

20,000

Take a moment to compare


these entries with the generic
entries illustrated in 4C.
Be certain to understand the
basis of the computations

Note that in a pooling, all costs


(both direct and indirect are
expensed as incurred

Dr. M. D. Chase
Advanced Accounting-219

Pooling Examples: Date of Acquisition

4. Investment in Issuier Corporation .......................................


1,200,000
Current liabilities...................................................................
100,000
Bonds Payable.....................................................................
800,000
Accumulated depreciation....................................................
500,000
Current assets.................................................................
Property, plant, and equipment........................................
Goodwill........................................................................
To record receipt of Issuer shares in a 100% pooling of interests

Common stock.......................................................................... 250,000


Retained earnings.....................................................................
950,000
Investment in Issuer corporation (to various shareholders)..
To record distribution of investment to shareholders

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Page 3
Note that poolings are a Book
Value concept (as opposed to
purchase which are recorded at
FMV (or as close as possible IAW
the purchase analysis)

450,000
2,000,000
150,000

In a pooling, all accounts are carried


over to the consolidated financials
at their book values i.e. the amounts
they were carried at on the
combiner books.

1,200,000

SHE accounts in a pooling of interests


Note that in a pooling, the consolidated SHE accounts consist of:
1. CS of the Issuer (adjusted for amounts issued to affect the pooling)
2. PIC of the Issuer (adjusted for amounts issued to affect the pooling)
3. RE of Issuer plus RE of Combiner *unless the consolidation was a bad deal.
*Note also that the RE of the Combiner will come over (i.e. be added to the RE of the Issuer) intact unless the consolidation was a bad deal
as used in this text, a bad deal is a pooling combination in which the issuer par issued was > combiner PIC received

EXAMPLE 2:

Issues:

- Recording a pooling when the issuing company gives par worth less than total PIC received.
- Recording a pooling when the issuing company gives par worth more than total PIC received.
The Bergman Company will be the issuing company in a pooling of interests with the Young Company. The two firms had the following
summarized balance sheets just prior to the pooling:
ASSETS:
Current assets............................
Property, plant, and equipment....
Accumulated depreciation............
Other assets..............................
Total assets........................
LIABILITIES:
Accounts Payable.......................... $
Accrued liabilities.......................
Common stock ...............($20 par)
PIC.......................................
Retained earnings.........................
Total liabilities...................
$

.$

Bergman
50,000
750,000
(250,000)
30,000
580,000

Young
40,000
312,500
(62,500)
10,000
300,000

40,000
$
30,000
10,000
-0200,000
($10 par) 100,000
50,000
10,000
160,000
280,000
$
300,000
580,000

REQUIRED: RECORD THE POOLING OF INTEREST UNDER EACH OF THE FOLLOWING INDEPENDENT SITUATIONS:
1. The pooling agreement requires Bergman to issue 3,000 shares of its $20 par stock for the net assets of the Young Company.
2. The pooling agreement requires Bergman to issue 7,500 shares of its $20 par stock for the net assets of the Young Company.
3.The pooling agreement requires Bergman to issue 12,500 shares of its $20 par stock for the net assets of Young Company. The
Bergman Company will also pay $20,000 for stock registration and issuance costs.

Dr. M. D. Chase
Advanced Accounting-219

Pooling Examples: Date of Acquisition

Long Beach State University


Page 4

EXAMPLE 2--Solution
REQUIREMENT 1: Record the pooling if the pooling agreement requires Bergman to issue 3,000 shares of its $20 par stock for the net
assets of Young Company.
--Step 1: Analyze the pooling to determine the makeup of PIC received.
Par issued ($20 x 3,000)..............................................................
$
60,000
Total PIC received: Common stock.............................................
$
100,000
PIC..............................................................
10,000 $
110,000
Par issued < PIC received; excess of PIC received over par issued to issuer PIC
$
50,000
RULE: Par issued is less than total PIC received (PIC here refers to C/S + PIC in excess of par); therefor:
1. allocate excess of PIC received over par issued to Issuer PIC
2. carry over Combiner RE intact and record at book values

--Step 2: Record the pooling


Current assets.....................................
40,000
Property, plant, and equipment..................... 312,500
Other assets.......................................
10,000
Accumulated depreciation......................
62,500
Accounts payable..............................
30,000
Common stock..................................
60,000
Retained earnings.............................
160,000
PIC Bergman...................................
50,000

Per Analysis

Intact because this is a good deal

NOTE:

In those cases where par issued is less than total PIC received (total PIC is PIC on stock and PIC in excess of par), it is helpful to
think of this as a "good deal" in that the par issued is less than the total PIC (CS + PIC in excess of par) received. In so far as it is
not GAAP to recognize gains or losses on transactions involving ones own stock, normal stock transaction rules apply. That is to
say, any credit is to "I" (Issuer) PIC and debits would first reduce "I" PIC and then reduce retained earnings of the Combiner.

NOTE:

--Any adjustment to PIC will always be an adjustment to Issuer ("I") PIC; Combiner ("C") PIC will never be reduced as part of the
combination process.
--After all available "I" PIC has been reduced, further adjustments are charged against "C" retained earnings; no charges will be
made to reduce "I" retained earnings unless all "C" retained earnings have been reduced to zero.

REQUIREMENT 2: Record the pooling if the pooling agreement requires Bergman to issue 7,500 shares of its $20 par stock for the net
assets of Young Company.
--Step 1: Analyze the pooling to determine the makeup of PIC received.
Par issued ($20 x 7,500)..............................................................
$
150,000
Total PIC received: Common stock.............................................
$
100,000
110,000
PIC..............................................................
10,000 $
Par issued < PIC received; excess of PIC received over par issued to issuer PIC
$
40,000
RULE: Par issued is more than total PIC received (PIC here refers to C/S + PIC in excess of par); therefor:
1. Reduce issuer PIC to extent available (in this case there is $50,000 available and only $40,000 is needed)
2. Carry over Combiner RE intact (Because Issue PIC was sufficient to absorb the debit) and record at book values

Dr. M. D. Chase
Advanced Accounting-219

Pooling Examples: Date of Acquisition

--Step 2: Record the pooling


Current assets.....................................
40,000
Property, plant, and equipment..................... 312,500
Other assets.......................................
10,000
PIC Bergman (Issuer)
40,000
Accumulated depreciation......................
62,500
Accounts payable..............................
30,000
Common Stock (Bergman) Issuer
150,000
Retained Earnings Young (Combiner)
160,000

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Assets and Liabilities alwayes recorded at Book Values

Per analysis

Carried over intact because Bergmans (Issuers) PIC was


sufficient to absorb the debit

NOTE: This is a "Bad Deal" in that the par issued is greater than the total PIC received (again, PIC here refers to C/S + PIC in excess of par).
In this case ("BAD DEAL") Issue PIC must be reduced by the excess of par issued over total PIC received. If Issuer PIC is not sufficient to cover
the difference, Combiner RE is reduced. This is an issued addressed biannually on the Uniform CPA examination. The CPA examiners want to
insure that candidates understand these procedures.

REQUIREMENT 3: Record the pooling if the pooling agreement requires Bergman to issue 12,500 shares of its $20 par stock for the net
assets of Young Company and Bergman must also pay $20,000 for stock registration and issuance costs.

--Step 1: Analyze the pooling to determine the makeup of PIC received.


Par issued ($20 x 12,500)..............................................................
$
250,000
Total PIC received: Common stock.............................................
$
100,000
110,000
PIC..............................................................
10,000 $
Par issued < PIC received; excess of PIC received over par issued to issuer PIC
$
140,000
RULE: Par issued is less than total PIC received (PIC here refers to C/S + PIC in excess of par); therefor:
1. Reduce issuer PIC to extent available:
$ 50,000
$
140,000
2. Reduce Combiner RE as required to balance:
90,000

--Step 2: Record the pooling


Current assets.....................................
40,000
Property, plant, and equipment..................... 312,500
Other assets.......................................
10,000
PIC Bergman (Issuer) .. 50,000
Accumulated depreciation......................
62,500
Accounts payable..............................
30,000
Common stock Bergman (Issuer).......
250,000
Retained earnings.............................
70,000

Combiners initial RE (given in facts)


Less:
Excess of Par issued over PIC received: $140,000
Less:
Issuer PIC available (given in facts)
Combiner RE carried to consolidated financial statements:

Amount of Bergman (Issuer) PIC Available,


refer to financial statements provided

$160,000
50,000

$ 90,000
$ 70,000

NOTE: Almost all CPA Exams make an issue of being able to compute the pooled retained earnings of the combined firm. For this
reason it is important to be able to quickly determine whether combiner retained earnings comes over to the combined firm
intact or must be reduced due to the excess of Issuer par over total Combiner PIC received. If you understand this approach, you
can look forward to doing well on the CPA examinations pooling questions.

Dr. M. D. Chase
Advanced Accounting-219

Pooling Examples: Date of Acquisition

Long Beach State University


Page 6

EXAMPLE-3: Issues: Recording a pooling in which Treasury Stock is Issued

Special considerations exist when a pooling of interest is accomplished via the use of Issuer Treasury Stock.
RULE: a: Retire the treasury stock

b. Treat all shares issued as "non-treasury" (normal) stock


Lets review a few things about stock transactions involving a companys own securities:
1. There are never gains or losses on stock transactions of a companys owns stock.
a. If a credit is needed, PIC-TS (the source of the credit) is credited.
b. If a debit is needed, PIC-TS (or source of the debit) is debited as available
c. If the amount exceeds the PIC-TS available, the remaining debit is to RE.
2. Further complicating the issue is the fact that there are two methods of accounting for TS: the COST and PAR methods

Review of Cost and Par Methods of Accounting for Treasury Stock

Consider the following facts:

ABC issues 1,000 shares of $10 par CS @ $15

All stock purchases are made in the open market


Date of Issuance:

Cash (1,000 x $15)


CS (1,000 x $10)
PIC (1,000 x $15 - $10)

Cost Method
15,000
10,000
5,000

Par Method
15,000
10,000
5,000

ABC purchases 100 shares @ $12


TS (100 x $12)
PIC (100 x $5)
PIC-TS
Cash

1,200

(100 x $10)

1,000
500
300
1,200

1,200

ABC purchases 100 shares @ $16


TS (100 x $16)
PIC (100 x $5)
PIC-TS
Cash

1,600

(100 x $10)

1,000
500
100

1,600

1,600

ABC retires the TS


CS @ par (200 x $10)
PIC (200 x $5)
PIC-TS
TS @ cost

2,000
1,000

2,000
200
2,800

Cost Method Summary

TS carried at cost
Relationship of CS and PIC is not maintained
Relationship of CS and PIC must be restored
upon retirement of TS

(TS @ par)

2,000

Par Method Summary

TS is carried at par
Relationship of CS and PIC is always correct
Retirement is at par value

Dr. M. D. Chase
Advanced Accounting-219

Pooling Examples: Date of Acquisition

Long Beach State University


Page 7

To illustrate the use of Treasury stock in a pooling, assume the following facts:
Issuer has agreed to exchange 10,000 shares of its currently held treasury stock for the net assets of Combiner Corp. Immediately prior to the
exchange the two firms had the following summarized balance sheets:
ASSETS
Current Assets...........................
Property, plant and equipment (net)......
Total Assets........................
Liabilities and Equity
Current liabilities......................
Common Stock ($10 and $5 par respectively)
Paid-in Capital in excess of par.........
Retained earnings........................
Treasury stock at cost...................
Total liabilities and Equity........

$
$

ISSUER
440,000
1,250,000
1,690,000

200,000
1,000,000
100,000
480,000
(90,000)
1,690,000

COMBINER
200,000
800,000
$
1,000,000

90,000
150,000
120,000
640,000
-01,000,000

REQUIRED:
1. State the procedure to be followed when issuer uses treasury stock to accomplish a pooling.
2. Analyze the investment
3. Present the necessary journal entries to record the pooling
EXAMPLE 3 -- SOLUTION
REQUIREMENT 1. a:
b:

Retire the treasury stock


treat all shares issued as "non-treasury" (normal) stock

REQUIREMENT 2: Analyze the pooling to determine the makeup of PIC received.


Par issued ($10 x 10,000).............................................................
$
100,000
Total PIC received:
Common stock.....................................................$ 150,000
PIC..............................................................
120,000 $
270,000
Par issued < PIC received; excess of PIC received over par issued to issuer PIC $
170,000
RULE: 1. carry over Combiner RE intact and record at book values
2. allocate excess of PIC received over par issued to Issuer PIC
REQUIREMENT 3: Journal entries to record the pooling
a: Retire the treasury stock:
Common stock..(10,000 x $10)...............
100,000
(reflects the common stock retired)
PIC "Issuer"..(10,000/100,000)($100,000)...
10,000
(apportions PIC IAW par method)
Treasury Stock........................
90,000 (eliminates treasury stock at cost)
PIC from retirement of treasury stock.
20,000 (create PIC from TS transactions; this is NOT A GAIN)

NOTE: if a debit were necessary the procedure is


1. reduce PIC from TS transaction to the extent it existed then
2. debit retained earnings as necessary

b: Record the pooling:


Current Assets.............................
200,000
Property plant and equipment ..............
800,000
Current liabilities...................
90,000
Issuer common stock (per analysis)....
100,000
Issuer PIC (per analysis).............
170,000
Retained earnings.....................
640,000 (Combiner RE intact per analysis) t