Introduction: Acquisition is a corporate term used to represent purchase of another company and gaining the ownership of the company.
Acquisition with contingent consideration.
Answer to Problem 1.7.1P
Value Analysis
Total Price paid 575000
(-) Total fair value of Net Assets (487000)
Explanation of Solution
Concept Used:
Acquisition is a corporate term to define buying all of another company and gain the ownership of the company.
There are four steps in acquisition of company
- Identify the Acquirer
- Determine the acquisition date
- Measure the fair value of acquiree
- Record the acquiree’s assets and liabilities that are assumed.
Identify the acquirer: for acquisition it is very important for acquiree’s to know the acquirer.
Following things should be kept in mind voting rights, large minority interest, governing body of combined entity and terms of exchange.
Determine the acquisition date of the company.
Measures the fair value of acquiree: the fair value of the aquiree as an entity is assumed to be paid by the acquirer. The price includes the contingent consideration, the costs of acquisition are not included in the price of the company acquired and expended.
Record acquiree’s assets and liabilities that are assumed: the fair value of all identifiable assets and liabilities of the acquire are determined and recorded.
Goodwill results when the price paid exceeds the fair value of net assets. Gain results when the price paid is less than the fair value of net assets.
Contingent consideration: contingent consideration is consideration given on the happening or non-happening of event. It is generally added in purchase consideration and increase goodwill.
Calculation:
Total Net Assets (A-B) 487000
Want to see more full solutions like this?
Chapter 1 Solutions
Advanced Accounting
- Hastings Corporation is interested in acquiring Vandell Corporation. Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.3 million, $2.9 million, $3.4 million, and $3.79 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 5% rate. Hastings plans to assume Vandell’s $10.29 million in debt (which has a 7.4% interest rate) and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.6 million each year for Years 1, 2, and 3. After Year 3, a target capital structure of 30% debt will be maintained. Interest at Year 4 will be $1.431 million, after which the interest and the tax shield will grow at 5%. Vandell currently has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.10 (i.e., based on its target capital structure). Vandell and Hastings each have a…arrow_forwardOn 1 January 2019 Apples Ltd acquired all the assets and liabilities of Berries Ltd. Details of the consideration transferred are as follows: Cash of $200,000, half to be paid on 1 January 2019, with the balance due on 1 January 2020. The incremental borrowing rate for Apples Ltd is 10%. 100,000 shares in Apples Ltd were issued. The share price on 1 January 2019 was $5.00 per share. This price represented a six-month high. Costs of issuing the shares was $1,000. Supply of a motor vehicle to Berries Ltd. The fair value of the motor vehicle is $60,000. The motor vehicle had an original cost of $90,000, and had accumulated depreciation of $40,000 as at 1 January 2019 in Apples Ltd accounting records. Legal fees and associated with the acquisition totalled $5,000. Required: Calculate the consideration transferred.arrow_forwardThe financial manager of Company A is evaluating Company B as a possible acquisition. Company B is expected to produce annual after- tax operating cash flows of P500,000. If the merger takes place, Company A will assume P1,250,000 of Company B's long-term liabilities. Company A's weighted average cost of capital is 11% and Company B's weighted average cost of capital is 14.5%. The acquisition will be evaluated as a perpetuity. Based on this information, the estimated value of the target company is nearest P3,448,276. P2,198,276. P4,545,455. d. 9. a. b. C. P3,295,455.arrow_forward
- Niagara Company is contemplating acquiring Toronto, Inc. on January 1, 2020. The information on Toronto's profit and net assets for the last five years are as follows: Profit Net Assets2019 P 4,000,000 P20,200,0002018 3,200,000 20,000,0002017 3,000,000 18,500,0002016 3,800,000 17,900,0002015 2,500,000 15,600,000 It is agreed that Niagara is willing to pay for goodwill measured by capitalizing at 40% excess of the average profits over normal return on net assets. The normal return on average net assets for the industry to which Toronto belongs is 10%.How much should Niagara Company pay to Toronto, Inc. in the…arrow_forwardOn 1 January 2019 Big Ltd acquired all the assets and liabilities of Small Ltd instead of Small Ltd's issued shares. Details of the consideration paid: Cash of $380,000, half to be paid on 1 January 2019, with the balance due on 1 January 2020. The incremental borrowing rate for Big Ltd is 10% . 100,000 shares in Big Ltd were issued. The share price on 1 January 2019 was $1.50 per share. This price was a six-month high. Cost of issuing the shares was $1,500. Owing to the doubts whether the share price would remain at $1.50, Big Ltd agreed to pay cash equal to value of any decrease in the share price below $1.50. This guarantee was valid for 3 months (to 31 March 2019). Big Ltd believed that there was a 75% chance that the share price would remain at or above $1.50 until 31 March 2019 and a 25% chance that it would fall to $1.40. Supply of a patent to Small Ltd. The fair value of the patent is $60,000. As the patent was internally generated by Big Ltd, it has not been recognised in Big…arrow_forwardThe financial manager of Company X is evaluating Company Y as a possible acquisition. Company Y is expected to produce annual earnings before interest and taxes P485,000. Depreciation write-offs on Company Y's assets are Pl20,000 annually. Both companies have a 34% marginal tax rate. If the merger takes place, Company X will assume P1,425,000 of Company Y's long-term liabilities. Company X's weighted average cost of capital is 9.25% and Company Y's weighted average cost of capital is 14.75%. The acquisition will be evaluated as a perpetuity. If Company X acquires Company Y for PI,125,000 in cash, then the estimated change in the combined wealth of Company X's shareholders will be nearest P433,729 increase. b. 10. a. P1,558,729 increase. P379,830 decrease. d. с. P2,207,838 increase. The following information refers to Questions No. 11 and 12: Ebony Corporation has negotiated the acquisition of Ivory Company in an exchange of shares. Under the terms of the merger, the exchange ratio will…arrow_forward
- H Company acquires 100% of the voting stock of R Company on January 1, 2021 for P400,000 cash. A contingent payment of P16,500 will be paid on April 15, 2022 if Ron Company generates cash flows from operations of P27,000 or more next year. H Company estimates that there is a 20% probability that R Company will generate at least P27,000 next year and uses an interest rate of 5% to incorporate the time value of money. The fair value of P16,500 at 5%, using a probability weighted approach is P3,142. What will H Company record as the acquisition price on January 1, 2021?arrow_forwardH Company acquires 100% of the voting stock of R Company on January 1, 2021 for P400,000 cash. A contingent payment of P16,500 will be paid on April 15, 2022 if Ron Company generates cash flows from operations of P27,000 or more next year. H Company estimates that there is a 20% probability that R Company will generate at least P27,000 next year and uses an interest rate of 5% to incorporate the time value of money. The fair value of P16,500 at 5%, using a probability weighted approach is P3,142. What will H Company record as the acquisition price on January 1, 2021? Your answerarrow_forwardH Company acquires 100% of the voting stock of R Company on January 1, 2021 for P400,000 cash. A contingent payment of P16,500 will be paid on April 15, 2022 if Ron Company generates cash flows from operations of P27,000 or more next year. H Company estimates that there is a 20% probability that R Company will generate at least P27,000 next year and uses an interest rate of 5% to incorporate the time value of money. The fair value of P16,500 at 5%, using a probability weighted approach is P3,142. What will H Company record as the acquisition price on January 1, 2021? *in good accounting form pls thanksarrow_forward
- Acquirer Company started negotiating for the acquisition of 69,000 outstanding shares of Acquiree Company. The offer was to pay P3,000,000 cash and issue 50,000 shares to the stockholders of Acquiree. Also, Acquirer promised to pay an additional P1,000,000 cash within one year if the net income of Acquiree exceeds P10,000,000. On July 1, 2022, the stockholders of Acquiree accepted the offer. On this date, the fair value of the shares and contingent consideration were P2,550,000 and P750,000 respectively. The stockholders’ equity of Acquirer and Acquiree at the date of acquisition were as follows (see image below).The fair value and book value of Acquiree’s identifiable assets and liabilities were the same except for inventory which was overvalued by P50,000 and Equipment which was overdepreciated by P100,000. Acquirer opted to measure NCI at fair value of P1,850,000. Acquirer also paid the following acquisition related costs: Legal fees - P41,200; Audit fees for SEC registration of…arrow_forwardAcquirer Company started negotiating for the acquisition of 69,000 outstanding shares of Acquiree Company. The offer was to pay P3,000,000 cash and issue 50,000 shares to the stockholders of Acquiree. Also, Acquirer promised to pay an additional P1,000,000 cash within one year if the net income of Acquiree exceeds P10,000,000. On July 1, 2022, the stockholders of Acquiree accepted the offer. On this date, the fair value of the shares and contingent consideration were P2,550,000 and P750,000 respectively. The stockholders’ equity of Acquirer and Acquiree at the date of acquisition were as follows (see image below).The fair value and book value of Acquiree’s identifiable assets and liabilities were the same except for inventory which was overvalued by P50,000 and Equipment which was overdepreciated by P100,000. Acquirer opted to measure NCI at fair value of P1,850,000. Acquirer also paid the following acquisition related costs: Legal fees - P41,200; Audit fees for SEC registration of…arrow_forwardALOY Company acquires 100% of the voting stock of BENNET Company on January 1, 2021 for P400,000 cash. A contingent payment of P16,500 will be paid on April 15, 2022 if BENNET Company generates cash flows from operations of P27,000 or more next year. ALOY Company estimates that there is a 20% probability that BENNET Company will generate at least P27,000 next year and uses an interest rate of 5% to incorporate the time value of money. The fair value of P16,500 at 5%, using a probability weighted approach is P3,142. What will ALOY Company record as the acquisition price on January 1, 2021?arrow_forward