Question

How to obtain acquisition date book value and fair value in excess of book value

Answer 1

In simple words, Book value of the company means Total Stockholder's equity (Information available in the Balance sheet on the date of acquisition.)

Now, Fair value different from book value. Fair value means market value as on the date of acquisition.

Let's try one example for the understands above concept.

XYZ Inc is 100% acquired by ABC inc on 1 Jan 2019

Balance Sheet of XYZ inc.	Amount ($)
Cash & Receivables	$                16,000
Account receivable	$                50,000
Inventory	$              106,000
Land	$              170,000
Property, Plant & Equipment	$              455,000
Less: Accumulated Depreciation	$           (182,000)
Total Assets	$              615,000
Accounts Payable	$                49,000
Short Notes Payable	$                  5,000
Bond Payable	$                68,000
Common Stock ($10 par value)	$              250,000
Additional Paid in capital	$              125,000
Retained Earnings	$              118,000
Total Liabilities & Equities	$              615,000
Additional Information
Account receivable balances include $ 5,000 which may not be received. Consider as a bad account.
Value of land on the date of acquisition is $300,000
Net Property, Plant & Equipment Value is Decreased by 40000
Fair value of all liabilities should not be changed.

Balance Sheet	Book value	Adjustment	Fair Value
Cash & Receivables	$                16,000		$       16,000
Account receivable	$                50,000	$                (5,000)	$       45,000
Inventory	$              106,000		$     106,000
Land	$              170,000	$              130,000	$     300,000
Property, Plant & Equipment	$              455,000	455000-182000-40000	$     233,000
Less: Accumulated Depreciation	$           (182,000)
Total Assets	$              615,000		$     700,000
Accounts Payable	$                49,000		$       49,000
Short Notes Payable	$                  5,000		$          5,000
Bond Payable	$                68,000		$       68,000
Common Stock ($10 par value)	$              250,000
Additional Paid in capital	$              125,000
Retained Earnings	$              118,000
Total Liabilities & Equities	$              615,000

Common Stock ($10 par value)	$              250,000
Additional Paid in capital	$              125,000
Retained Earnings	$              118,000
Book value of XYZ inc.	$              493,000
Fair value of total assets	$              700,000
Less: Liabilities (49000+5000+68000)	$              122,000
Fair value of XYZ inc.	$              578,000
Book value of XYZ inc.	$              493,000
Fair value in excess of book value	$                85,000