Puño, Vinabie A.

MWF (1:00 – 2:00)

AC-302 Mrs. Mariciel Gertrudes Gomez

Prelim Discussion #2

LEARNINGS

Problem 13-1
In recording the acquisition of net assets of an acquirer or the parent company of the business
combination from the acquiree, it is important to remember that all accounts included in the recording
are measured at their estimated fair market value. The assets of the acquired should be debited on the
books of the acquirer, and the liabilities and cash paid by the acquirer for the assets acquired should be
credited along with the income from acquisition. Income or gain from acquisition is determined by
subtracting the fair value of the net identifiable assets acquired from the price paid or the consideration
given by the acquirer. However, income from acquisition is not always present on a business
combination, it is only present when the consideration paid by the acquirer is less than the fair value of
net identifiable assets acquired. If it is the other way around, wherein the price paid exceeds the fair
value of the net identifiable assets acquired, then a goodwill should be recognized. The difference
between the price paid and the fair value of the net identifiable assets acquired is initially determined
before the recognition of the acquisition. In another entry on the book of the acquirer, all acquisition-
related costs are recognized as expense in the period in which the costs are incurred. Now, on the book
of the acquiree, recognize the sale of the net assets by debiting the cash received and the current
liabilities, then eliminate all the assets sold and recognized them at book value and record the gain or
loss from the sale which is charged to the retained earnings. In another entry, the acquiree should
record the liquidation of the company by eliminating all the stockholder’s equity accounts and crediting
the cash received.

Problem 13-5
On a Consolidated Statement Financial Position, in order to find out the combined amounts of
the accounts of the acquirer and the acquiree, the assets and liabilities of the acquiree, measured at fair
value, should be added to the same accounts measured at book value on the part of the acquirer. For
the stockholder’s equity accounts, only the acquirer’s accounts are affected. The common stock of the
acquirer will increase, brought by the issuance of the shares which is the payment for the net assets of
the acquiree. The recording of common stock is always at par. Now, the difference between the par and
fair value will be recorded on the additional paid-in capital of the acquirer. Technically, the acquisition of
the net asset will increase the value of the accounts on acquirer’s Statement of Financial Position.

Problem 14-3
In a stock acquisition, the acquirer is now recognized as the parent, while the acquiree is the
subsidiary. Now the parent company does not deal wholly with the entire subsidiary company, but only
with its existing shareholders. To record the acquisition, an investment account is recorded on the
journal entry. Unlike the net asset acquisition wherein the assets acquired are recognized, stock
acquisition is recorded by debiting Investment in Subsidiary account and crediting the cash paid by the
parent. The investment account represents the controlling interest in the net assets of the subsidiary. In
recording the acquisition costs, retained earnings are recorded instead of acquisition-related expenses
because consolidation only requires statement of financial position. Goodwill nor income from
acquisition is not recorded as well because these are to be recognized only on the consolidated financial
statements. In determining the excess schedule and its allocation for the parent, subtract the share of
the parent on the book value of subsidiary from the share of the parent in the fair value of the
subsidiary. The same process applies for the NCI, but the share of the NCI on its book value and fair
value is to be used.

Problem 14-7

Preparing a consolidation working paper for consolidated statement of financial position is

somehow similar to the preparation of the common and usual Statement of Financial Position. All the
accounts are listed on the table, separate the parent from the subsidiary, then recognize all the entries
on the working elimination paper. Treat the elimination entry as adjustments to the accounts. These
entries include the elimination of subsidiary stockholder’s equity against the investment account and
NCI account, and the allocation and determination of excess of net assets to their fair values. Lastly, add
the amount of each account of parent and subsidiary, taking into consideration the elimination entry, in
order to find out the consolidated amounts of each account.

Problem 14-11

In the preparation of the determination and allocation of excess schedule, the excess is
determined when the book value of the interest acquired is deducted from the price paid of the parent.
After that, when the value of the excess is determined, it is then allocated to the assets and liabilities,
whom values are determined by deducting their historical cost from their appraisal value or by adjusting
the assets and liabilities to their fair values. The remaining amount after the allocation of the assets and
liabilities is then recognized as the goodwill. The total adjustments on the subsidiary net assets are
allocated on the Controlling Interest of the parent and on the NCI. Remember that when the fair value
of an asset exceeds the book value, the difference reduces the excess, and when asset’s book value is
higher than its fair value, the difference increases the said excess.