Introduction: Acquisition is a corporate term used to represent purchase of another company and gaining the ownership of the company.
To show: Acquisition with contingent consideration.
Answer to Problem 1.7.2P
No entry will be passed because the probability is 90%.
Explanation of Solution
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.
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
Value Analysis
Total Price paid
575000
(-) Total fair value of Net Assets (487000)
Goodwill 88000
Want to see more full solutions like this?
Chapter 1 Solutions
Advanced Accounting
- On 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_forwardJackson Inc. purchased 30,000 shares of common stock of the Pixel Corporation for $10 per share on January 2, 2020. During 2020, Pixel had 100,000 shares of common stock outstanding, reported net income of $200,000, and paid cash dividends of $100,000. The fair value of Pixel stock on December 31, 2020 is $12 per share. On December 31, 2020, what will Jackson report on its Balance Sheet for its investment in Pixel? How much revenue should Jackson report for 2020 on its investment in Pixel? Round your answers to the nearest whole number. Dot not use dollar signs($) or commas(,). Blank # 1 Blank # 2arrow_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
- The 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_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_forwardHastings 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_forward
- Penn Corp. is analyzing the possible acquisition of Teller Company. Both believes the acquisition will increase its total aftertax annual cash flow by $1,176,015.93 indefinitely. The current market value of Teller is $23,453,722 and that of Penn is $63,348,212. The appropriate discount rate for the incremental cash flow is 13.63%. Penn is trying to decide whether it should offer 36% of its stock or $35,478,193 in cash to Teller's shareholders. What is the equity cost of the acquisition? HINT: Compute the value of the combined firm by adding the current value of the target with the present value of the differential cash flow of the combined firm. To determine the equity cost of the acquisition, add the current value of the acquirer and then multiply by the proposed percentage of the stock that has been offered for the firm.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_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_forward
- The statement of financial position as of December 31, 2020, for Taube Corporation follows: (all amounts in thousands) Assets Liabilities and Shareholders' Equity Current assets $62,000 Current liabilities $22,000 Non-current assets 95,000 Long-term liabilities 47,000 Shareholders' equity 88,000 Total liabilities and Total assets $157,000 shareholders' equity $157,000 The company's management is evaluating a couple of options to finance the acquisition of new equipment with a cost of $37 million. X Your answer is incorrect. Taube has a cash balance of $21 million as of December 31, 2020. Determine the debt to equity ratio and net debt as a percentage of total capitalization ratio. Assume that only the company's long-term liabilities are interest bearing. (Round answers to 2 decimal places, e.g. 1.25.) Debt to Equity 0,78 :1 Net Debt as a Percentage of Total Capitalization 2.87 :1 eTextbook and Media X Your answer is incorrect. Taube is considering borrowing $37 million by taking out a…arrow_forwardOn January 1, 2020, Planet Company purchased an equipment with a cash price of P2,000,000. The supplier can choose how the purchase is to be settled. The choices are 20,000 shares with par value of P50 in one year's time, or a cash payment equal to the market value of 15,000 phantom shares on December 31, 2020. At grant date on January 1, 2020, the market price of each share is P80 and on the date of settlement on December 31, 2020, the market price of each share is P100. What amount should be recognized as share premium on December 31, 2020 if the supplier has chosen the share alternative?arrow_forwardAlmony Ltd has announced a cash offer to acquire Bricker Co. Almony Ltd’s shares are trading at $27 and there are 3 million shares of outstanding. Bricker Co’s shares are trading at $4 and there are 1.5 million shares outstanding. Almony Ltd estimates that the acquisition will incur integration costs of $400,000 each year for the first three years. Almony Ltd expects to be able to reduce overlapping capital expenditures by $750,000 in the first five years of the acquisition. The required rate of return for Almony Ltd is 8%. Assume cash flows occur at the end of each year. Based on this information , what is the maximum price Almony Ltd can offer before destroying shareholder value? * with detailed calculation.arrow_forward