Chapter 3 – Business Combinations

SSP 3A-1

(a)

100% Purchase of T Ltd., January 1, 20X2

Purchase price $260,000

Less carrying value of Target’s net identifiable assets (100%) (130,000)

= Fair value adjustment, allocated below 130,000

Carrying Value Fair Fair Value

FVA Allocated

(a) Value Adjustment

  (b) (c)=(b)–(a)

Buildings (net) 150,000 250,000 100,000 100,000 Fair value adjustment allocated to net identifiable assets  

($100,000)

Net asset carrying value $150,000  

Fair value of assets acquired $250,000  

Balance of FVA allocated to goodwill $30,000

(b)

100% Purchase of T Ltd., January 1, 20X2

Purchase price $260,000

Less carrying value of Target’s net identifiable assets (100%) (130,000)

= Fair value adjustment, allocated below 130,000

Carrying Value Fair Fair Value

FVA Allocated

(a) Value Adjustment

  (b) (c)=(b)–(a)

Buildings (net) 150,000 250,000 100,000 100,000

Deferred tax liability @ 40% (40,000) (40,000) (40,000)Fair value adjustment allocated to net identifiable assets    

($60,000)

Net asset carrying value $150,000  

Fair value of assets acquired $210,000  

Balance of FVA allocated to goodwill $70,000

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Chapter 3 – Business Combinations

SSP 3A-2

100% Purchase of Shelley Inc., January 1, 20X6

Purchase price $850,000

Less carrying value of Target’s net identifiable assets (100%) (450,000)

= Fair value adjustment, allocated below 400,000

Carrying Value Fair Fair Value

FVA Allocated

(a) Value Adjustment

  (b) (c)=(b)–(a)

Cash $55,000 $55,000 —

Accounts receivable 135,000 135,000 —

Inventories 90,000 90,000 —

Land 180,000 300,000 $120,000 $120,000

Buildings (net) 430,000 450,000 20,000 20,000

Equipment 120,000 180,000 60,000 60,000

Accounts payable (140,000) (140,000) —

Long-term debt payable (420,000) (420,000) —

Deferred tax liability (50,000) (50,000) (50,000)Fair value adjustment allocated to net identifiable assets  

($150,000)

Net asset carrying value $450,000  

Fair value of assets acquired $600,000  

Balance of FVA allocated to goodwill $250,000

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Chapter 3 – Business Combinations

Patricia Ltd.Consolidated SFPJanuary 1, 20X6

ASSETS  

  Cash (80,000 + 55,000) $135,000

  Accounts receivable (220,000 + 135,000) 355,000

  Inventories (100,000 + 90,000) 190,000

  Total current assets 680,000

  Land (800,000 + 180,000 + 120,000) 1,100,000

  Buildings (net) (1,100,000 + 430,000 + 20,000) 1,550,000

  Equipment (net) (720,000 + 120,000 + 60,000) 900,000

  Investment in Shelly Inc. (850,000 + 0 - 850,000) —

  Goodwill (+250,000) 250,000

TOTAL ASSETS $4,480,000

LIABILITIES AND SHAREHOLDERS’ EQUITY  

  Accounts payable (120,000 + 140,000) $260,000

  Long-term debt payable (400,000 + 420,000) 820,000

Deferred tax liability (+ 250,000) 50,000

   Total liabilities 1,130,000

  Common shares (1,000,000 + 850,000 + 200,000 - 200,000) 1,850,000

  Retained earnings (1,500,000 + 250,000 - 250,000) 1,500,000

   Total shareholders’ equity 3,350,000

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $4,480,000

Note: The bolded amounts are adjustments that must be made to • recognize fair value increments; • recognize goodwill; • eliminate Patricia’s investment account;  • recognize the deferred tax liability arising from the acquisition; and • eliminate Shelley’s date-of-acquisition shareholders’ equity.

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