Question

ICP 4

On December 31, 20X4, Peterson Corporation purchased shares of Sullivan Inc. by issuing its own shares worth $1,500,000. Peterson’s and Sullivan’s statements of financial position immediately after the purchase transaction were as follows:

	Peterson	Sullivan	Sullivan
	Carrying	Carrying	Fair
	value	Value	value
Cash	$260,000	$110,000	$110,000
Accounts receivable	670,000	350,000	350,000
Inventory	1,200,000	920,000	1,050,000
Land	800,000	250,000	340,000
Buildings and equipment	2,500,000	700,000	650,000
Investment in Sullivan	1,500,000
	$6,930,000	$2,330,000
Current liabilities	$1,750,000	$800,000	$800,000
Long-term liabilities	2,000,000	600,000	550,000
Common shares	1,600,000	300,000
Retained earnings	1,580,000	630,000
	$6,930,000	$2,330,000

 

Both companies use the straight-line method of depreciation. Sullivan’s buildings and equipment have a remaining useful life of 10 years and the long-term liabilities of Sullivan mature on December 31, 20X9.

In addition to the above, Sullivan owns the rights to a patent that has a fair value of $225,000. The patent’s remaining useful life is 12 years.

Required:

For each of the assumptions below, prepare (i) the acquisition cost allocation and (ii) the consolidated statement of financial position on the date of acquisition.

a) Peterson purchased 100% of the shares of Sullivan.

b) Peterson purchased 80% of the shares of Sullivan and accounts for the non-controlling interest using the fair value enterprise (FVE) method.

c) Peterson purchased 80% of the shares of Sullivan and accounts for the non-controlling interest using the identifiable net assets (INA) approach.

Answer 1

Solution to ICP 4

Note: The Σ symbol is used to indicate a sum of the carrying values of the parent company and the subsidiary company.

a).  Peterson purchased 100% of the shares of Sullivan:

Acquisition price	$1,500,000
Less: carrying value of net assets acquired ($300,000 + $630,000)	930,000
Acquisition differential	570,000
Allocation:
	FV – BV
Inventory	$130,000
Land	90,000
Building and equipment	-50,000
Patent	225,000
	BV – FV
Long-term liabilities	50,000	445,000
Goodwill		$125,000

 

Peterson Corporation
Consolidated statement of financial position
As at December 31, 20X4
Cash (Σ)	$370,000
Accounts receivable (Σ)	1,020,000
Inventory (Σ + 130,000 AD)	2,250,000
Land (Σ + 90,000 AD)	1,140,000
Buildings and equipment (Σ – 50,000 AD)	3,150,000
Patents (AD)	225,000
Goodwill (AD)	125,000
	$8,280,000
Current liabilities (Σ)	$2,550,000
Long-term liabilities (Σ – 50,000 AD)	2,550,000
Common shares	1,600,000
Retained earnings	1,580,000
	$8,280,000

Note that there is a significant amount of replication in parts (b) and (c). Those items that are different from part (a) have been italicized.

Peterson purchases 80% of the shares of Sullivan
(contrast FVE method with INA method)		b)	c)
Purchase price		$1,500,000	$1,500,000
NCI ($1,500,000 / 0.8) × 20%		375,000
NCI: Net assets of Sullivan at FV ($1,375,000 × 20%)			275,000
Implied transaction value		1,875,000	1,775,000
Less: net assets acquired ($300,000 + $630,000)		930,000	930,000
Acquisition differential		945,000	845,000
Allocation:
	FV – BV
Inventory	$130,000
Land	90,000
Building and equipment	-50,000
Patent	225,000
	BV – FV
Long-term liabilities	50,000	445,000	445,000
Goodwill		$500,000	$400,000

 

 

Peterson Corporation
Consolidated statement of financial position
As at December 31, 20X4
	FVE	INA
Cash (Σ)	$370,000	$370,000
Accounts receivable (Σ)	1,020,000	1,020,000
Inventory (Σ + 130,000 AD)	2,250,000	2,250,000
Land (Σ + 90,000 AD)	1,140,000	1,140,000
Buildings and equipment (Σ – 50,000 AD)	3,150,000	3,150,000
Patents (AD)	225,000	225,000
Goodwill (AD)	500,000	400,000
	$8,655,000	$8,555,000
Current liabilities (Σ)	$2,550,000	$2,550,000
Long-term liabilities (Σ – 50,000 AD)	2,550,000	2,550,000
Common shares	1,600,000	1,600,000
Retained earnings	1,580,000	1,580,000
Non-controlling interest	375,000	275,000
	$8,655,000	$8,555,000

 

Solution to ICP 4

Note: The Σ symbol is used to indicate a sum of the carrying values of the parent company and the subsidiary company.

a).  Peterson purchased 100% of the shares of Sullivan:

Acquisition price	$1,500,000
Less: carrying value of net assets acquired ($300,000 + $630,000)	930,000
Acquisition differential	570,000
Allocation:
	FV – BV
Inventory	$130,000
Land	90,000
Building and equipment	-50,000
Patent	225,000
	BV – FV
Long-term liabilities	50,000	445,000
Goodwill		$125,000

 

Peterson Corporation
Consolidated statement of financial position
As at December 31, 20X4
Cash (Σ)	$370,000
Accounts receivable (Σ)	1,020,000
Inventory (Σ + 130,000 AD)	2,250,000
Land (Σ + 90,000 AD)	1,140,000
Buildings and equipment (Σ – 50,000 AD)	3,150,000
Patents (AD)	225,000
Goodwill (AD)	125,000
	$8,280,000
Current liabilities (Σ)	$2,550,000
Long-term liabilities (Σ – 50,000 AD)	2,550,000
Common shares	1,600,000
Retained earnings	1,580,000
	$8,280,000

Note that there is a significant amount of replication in parts (b) and (c). Those items that are different from part (a) have been italicized.

Peterson purchases 80% of the shares of Sullivan
(contrast FVE method with INA method)		b)	c)
Purchase price		$1,500,000	$1,500,000
NCI ($1,500,000 / 0.8) × 20%		375,000
NCI: Net assets of Sullivan at FV ($1,375,000 × 20%)			275,000
Implied transaction value		1,875,000	1,775,000
Less: net assets acquired ($300,000 + $630,000)		930,000	930,000
Acquisition differential		945,000	845,000
Allocation:
	FV – BV
Inventory	$130,000
Land	90,000
Building and equipment	-50,000
Patent	225,000
	BV – FV
Long-term liabilities	50,000	445,000	445,000
Goodwill		$500,000	$400,000

 

 

Peterson Corporation
Consolidated statement of financial position
As at December 31, 20X4
	FVE	INA
Cash (Σ)	$370,000	$370,000
Accounts receivable (Σ)	1,020,000	1,020,000
Inventory (Σ + 130,000 AD)	2,250,000	2,250,000
Land (Σ + 90,000 AD)	1,140,000	1,140,000
Buildings and equipment (Σ – 50,000 AD)	3,150,000	3,150,000
Patents (AD)	225,000	225,000
Goodwill (AD)	500,000	400,000
	$8,655,000	$8,555,000
Current liabilities (Σ)	$2,550,000	$2,550,000
Long-term liabilities (Σ – 50,000 AD)	2,550,000	2,550,000
Common shares	1,600,000	1,600,000
Retained earnings	1,580,000	1,580,000
Non-controlling interest	375,000	275,000
	$8,655,000	$8,555,000