Financial 4 - Acquisition Method

Question 1

Issuing Shares Under the Acquisition Method

Answer 1

• The transaction is recorded at fair market value of the stock

Total Investment = Fair Value of Shares Issued
Common Stock = Par Value of Shares Issued
Additional Paid-In Capital = FV - PV

Question 2

Acquisition Cost / Price Related to Fair Value

Answer 2

• If the cost of the acquisition exceeded the fair value of the identifiable net assets, the net assets are to be valued at Fair value. This is done by taking the selling price - disposal costs and a reasonable profit allowance
• If the cost of the acquisition is less than fair value of the identifiable net assets, the following steps are required:
  1. The balance sheet is adjusted to fair value (which creates a negative balance in the acquisition account)
  2. Identifiable intangible assets are recognized at fair value, which increases the negative balance in the acquisition account
  3. The total negative balance in the acquisition account is recorded as a gain

*Goodwill is the difference between fair value of the subsidiary and the fair market value of the nets assets acquired

Question 3

Business Combination Reporting Rules

Answer 3

• Registration and issuance costs are recorded as a direct reduction of the value of the stock by reducing APIC.
• Direct out-of-pocket costs such as legal and consulting fees are expensed. Examples: fees of finders and consultants, due diligence costs
• Acquisition costs associated with a business transaction must be expensed as incurred in the current period
• Debt securities create liabilities and debt security costs are capitalized and amortized