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Dr. M.D.

Chase
Advanced Accounting-221

Long Beach State University
Purchase/Pooling Comparison: Date of Acquisition
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PURCHASE/POOLING COMPARISON

In order to highlight the differences between purchase and pooling consolidations, the following examples will be based on a single set of facts so that
the student can concentrate of the differences between the two approaches. Pay particular attention to the following:

The decision on how to account for a business combination is not an “election”. It is based on whether a set of criteria has been satisfied
(see APB-16). If all of the requirements for a pooling of interests have been satisfied, the combination will be accounted for as a pooling.

If one or more of the criteria have not been satisfied, the combination must be accounted for as a purchase. If accounted for as a purchase,
the accountant may then “elect” whether to use the Cost/FMV approach (SFAS 12/SFAS 115) or the Equity Method (APB-18)

Combiner Corporation merged into Issuer Corporation on August 31, 19x4, and Combiner Corporation ceased to exist. Both corporations had fiscal
years ending on August 31, and Issuer Corporation will retain this fiscal year. The worksheet contains a balance sheet for each corporation and a
combined balance sheet as of August 31, 19x4, immediately before the merger, and net income figures for each corporation for the fiscal year ended
August 31, 19x4.
Additional information as of the date of the merger:
A. The fair value and book values of the assets and liabilities on August 31, 19x4, of Issuer and Combiner was as follows:
Combiner

Issuer

Difference

Difference
Book Value

FMV
Current assets...................

$ 4,950,000

PP& E (Net)

$

22,000,000

4,350,000
18,500,000

Patents.............................

570,000

450,000

Market research...............

150,000

150,000

Total assets...............

$27,670,000

$

23,450,000

2,650,000

$

2,650,000

$

12,000,000

Liabilities..........................
Common stock

($10 par)

400,000
3,500,000
120,000
-0-

FMV

Book Value

$ 3,400,000$

$ 3,000,000

14,000,000

11,300,000

360,000

200,000

40,000
$17,800,000

-0-

2,100,000

($ 5 par)..................

-0$14,500,000

-0-

2,100,000

3,750,000

PIC.....................................

4,200,000

3,200,000

Retained earnings.......................

5,850,000

5,450,000

Treasury stock,@ cost (100,000 shares)..
Total equities.....................
Net assets..........

B.

-0-

(1,250,000)
$

23,450,000

$

2,450,000

_

$14,500,000
$ 15,700,000

$25,020,000

Net income, year ended 8/31/x4.........

400,000
2,700,000
160,000
40,000

$ 1,300,000

Issuer Corporation capitalized its fiscal year 19x4 market-research costs and has always amortized them over five years, beginning with the year of
expenditure. All Issuer's market-research costs have been appropriately capitalized and amortized for the current and preceding years. Combiner
Corporation incurred $50,000 in market-research costs, which were expensed during the fiscal year ending August 31, 19x4. Combiner did not
have any market-research costs in any year before 19x4. Combiner will adopt Issuer's method of accounting for market-research costs.

C.

Internally generated general expenses incurred because of the merger were $25,000 and are included in Issuer's current

assets as a prepaid

expense.
D.

There were no intercompany transactions during the year.

E.

Before the merger, Issuer had 3,000,000 shares of common stock authorized; 1,200,000 shares issued; and 1,100,000

shares outstanding.

Combiner had 750,000 shares of common stock authorized, issued and outstanding.
REQUIRED:
-- Under each of the two following independent situations
1. Analyze the investment
2. Prepare the necessary journal entries to record the investment under the appropriate GAAP.
3. Compute net income.
Situation One: Issuer Corporation exchanged 400,000 shares of previously unissued common stock and 100,000 shares of treasury stock for all the
outstanding common stock of Combiner Corporation. All conditions for a pooling of interests were met.
Situation Two: Issuer Corporation purchased the assets and assumed the liabilities of Combiner Corporation by paying $3,100,000 cash and issuing
debentures of $16,900,000 at face value.

.200k). 1... Market research.000 ========= POOLING INVESTMENT A. Retire the stock: Common stock (100.. therefore the analysis contains two steps: 1) Retire the stock and..............750.........000 25..000 (per analysis above) (per analysis above) (“Good Deal”.000..250...........000 Retained earnings.. Convert both companies to the same GAAP: (Combiner's net income must be adjusted to reflect the capitalization of market research costs as opposed to expensing...........950..000 $6.000 PIC ‘Issuer’ (100k/1...... Current assets.......... Record the Exchange Current assets.........000 Plant and equipment (net)..000 x $10).000 x $10)..000 Analysis: Par issued (500....000 Common stock ($10 par).000 PIC from retirement of T/S...000/5 years).... 5. Recorded at Book Value 200...000 C. comes over intact) To record issuance of stock and receipt of net assets in pooling of interest for Combiner Corporation B...Dr.......000 Retained earnings....200... PIC... 5..000 $1..000........000 Pooling combinations expense all direct and indirect costs currently as opposed to purchase combinations that capitalize direct costs and expense indirect costs... Chase Advanced Accounting-221 Long Beach State University Purchase/Pooling Comparison: Date of Acquisition Page 2 SOLUTION SITUATION 1: POOLING OF INTERESTS REQUIREMENT 1: ANALYZE THE INVESTMENT This problem contains treasury stock.....$3..000. Expense the costs of the business combination currently: Issuer retained earnings. 11........200k)($4.......000 Liabilities.........000....950. 2....... 3............ 25......300.000 was expensed but only $10...... 40............000 Patents.. 2) Treat stock issued as a new issue of securities.....000 Treasury stock at cost....450. 1.... 3..........D... 100....950.100......000 Total PIC rec'd: C/S ... .... 40.. M......... 350....000 “Good Deal” Par issued < PIC received therefore : Therefore credit to Issuer PIC....000 PIC........ REQUIREMENT 2: RECORD THE $5.............1...... $50...000 should have been (50......................

........Dr...600.....000 Debentures....(Full cost) Goodwill = Excess of Cost > FMV of all identifiable assets and liabilities 20............000 Non Current assets will be valued at as close to FMV as possible based on the excess of cost > BV available to them....000 Patents.... 40.... 3.........000 4........ 7. 16................D... 12.. SOLUTION SITUATION 2: PURCHASE Analyze the investment: Cost (cash)..........000 Recall that Goodwill can only be created in a purchase and only after all the accounts have been valued at full FMV....700. 160.000 7.......300...000 To record investment (at FMV) Current assets.000.900..... Examine the analysis and be sure you see how these amounts are computed.........900.. 2.000 Cash... M.......750....450....... Marketable Securities and Liabilities are FMV accounts and will always be valued at full FMV if there is difference between FVM and Book Value 400.........300....000 Less: Purchased Book value.000 Balance to Goodwill. 7.....700.......... Current Assets...300........000 Investment in Subsidiary..100............... 3...400. 40.. Chase Advanced Accounting-221 Long Beach State University Purchase/Pooling Comparison: Date of Acquisition Page 3 Remember that purchases are based on FMV (as opposed to poolings that are based on the book values of the assets acquired.......000... 3............ 12..... 3...... • • 400.... .......000 Market research..200. 3........000 This means that all accounts in a purchase will be valued as close to FMV as possible..000 Investment in Subsidiary........... $ Excess of cost over book value...........000 • Note that the investment account must be eliminated in a purchase consolidation........000 To allocate the excess of cost over book value as per the analysis of the investment Subsidiary Common Stock.. • The two entries eliminate the investment account and replace it with the assets and liabilities valued at full FMV To eliminate the investment account Note that these amounts represent the differenct between book value and FMV as computed in the analysis..000 Patents.......000 160.........000 Subsidiary PIC..... 16.........600..............000 20...000 PP&E.000 Subsidiary retained earnings...........000 Attributable to: Current assets.400......RECORD THE INVESTMENT Investment in Blue Co........... $ (Debentures assuming this is also FMV)....... PP&E....... Goodwill..000 Market research......000 Note that assets and liabilities are recorded at full FMV We know this is possible because goodwill was recorded 2... 4.... 5.. with the exception of the FMV accounts which will always be valued at full FMV without exception........100.....600.. A.