Hilton6E Sm03

Topics: Balance sheet, Generally Accepted Accounting Principles, Goodwill Pages: 46 (11544 words) Published: February 2, 2013
Chapter 3

Business Combinations
Case 1
Management of the parent company wants to compare the consolidated balance sheet under two methods of reporting a 100%-owned subsidiary and wants to know why fair value is not always used for all companies and which method best reflects the economic reality of the business combination.

Case 2
Two companies have agreed to form a third company that will issue shares for each company’s net assets. A report is required that discusses the accounting implications.

Case 3 (prepared by J. C. (Jan) Thatcher of Lakehead University, and Margaret Forbes formerly of the University of Saskatchewan) This case involves a share exchange between two companies where the shareholders of the combining companies will each own 50 percent of the shares of the combined company. The student has to adopt the role of an accounting adviser to the board of directors, and prepare a report explaining the accounting required for the share acquisition and the amounts that will appear on the balance sheet for certain assets.

Case 4 (prepared by Peter Secord, Saint Mary’s University) The merger of Conoco Inc. and Gulf Canada Resources Limited presented many problems with allocating the acquisition price to a wide variety of tangible and intangible assets associated with companies in the oil and gas industry. Students are required to discuss the valuation problems resulting from this merger.

Case 5

The merger of two professional services firms is described and the student is asked to prepare a memo discussing the accounting implications of various aspects of the merger including the valuation of work in progress and the transfer of assets to a separate management company.

Case 6

Information is produced from the notes to a real company’s financial statements where an acquisition occurring during the year turns out to be a reverse takeover. Students must identify this and describe the accounting required.


Problem 1 (25 min.)
Preparation of a consolidated balance sheet on the date of a business combination under the acquisition and new entity methods. The question also asks the student to calculate the resulting current and debt/equity ratios under each method and describe which method shows the stronger liquidity and solvency positions.

Problem 2 (25 min.)
Three companies agree to merge. The preparation of a balance sheet immediately after the merger is required.

Problem 3 (25 min.)
Journal entries and preparation of a statement of financial position are required for a purchase-of-net-assets type of business combination where the method of payment is either cash or a common share issue.

Problem 4 (20 min.)
This problem requires the preparation of a statement of financial position immediately after the statutory amalgamation of two companies. Part of the purchase price needs to be allocated to an unrecorded patent.

Problem 5 (25 min.)
Preparation of a balance sheet immediately after a business combination in which one company issues shares to acquire the net assets of another company. Part of the purchase price needs to be allocated to unrecorded customer service contracts.

Problem 6 (20 min.)
Two companies agree to merge whereby one will issue shares to acquire the net assets of the other. A balance sheet using the acquisition method is required. Part of the purchase price needs to be allocated to a favourable lease arrangement.

Problem 7 (25 min.)
A journal entry and the preparation of a consolidated balance sheet are required after one company acquires 100% of the shares of another company by paying cash. The assumption is changed so that the price does not change but shares are the means of payment rather than cash. The student needs to determine whether part of the purchase price should be allocated to the subsidiary’s assembled workforce.

Problem 8 (25 min.)
Preparation of a statement of...
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