Question

Please answer the following questions:

1. a) What is a basket purchase?

b) How are you supposed to account for basket purchases? What are the options, if any?

c) What is a ‘business combination? What are the procedures for its accounting?

d) What is goodwill? How do you calculate it? Is it amortized? What FASB regulates its treatment? (be specific!)

2. As an individual with available liquidity on hand you have a choice to make an investment in a company. You may choose to purchase a bond or purchase stock. You are in your mid-50s and the funds you are willing to invest represent 30% of your net worth and 50% of your liquidity. The company has been in business for 15 years and has issued bonds in the past.

What is your thought process in order to make a decision? What do you want to review in the company? What do you want to know?

Give all the details as to what would be your criteria, with full details, prior to making a decision. Be specific, ranging from YOU personally to the COMPANY. At the end make a decision as to what you would do.

Answer 1

1a. A single transaction which involves purchase of a group of assets or multiple fixed assets is called as basket purchase.

1b. Generally while accounting for a basket purchase the consideration paid for the basket purchase, the acquired assets and their quantities, costs which directly assigned to a Specific asset are considered the other way can be to Find out the appraised values of whose cost is not specifically identified in the transaction and Allocate the remaining payment to the remaining assets in proportion of their appraised values.

1c. business combination is the process in which a business acquires the other business. amalgamation, Merger and takeover can be treated as types of business combinations. for each type of business there are set of accounting procedures. in business combination accounting should be done in acquiror books and the acquiree books. accounting in the books of acquiror will be for purchase of assets and liabilities with or without goodwill and the payment of consideration. in the same way the acquiree books accounting will be for the sale of business, receipt of consideration and closing of accounts.

1d. Goodwill is an intangible asset of a company. it represents the name and fame of a company. in a layman view if company A acquires company B for $200,000 even though the net worth of company B is $180,000 then the additional $20,000 consideration paid is treated as goodwill. so the goodwill can be calculated by substracting the networth of the selling company from the purchase consideration. Purchased goodwill should only be shown in the books of accounts and should be amortized based on the years of purchase. as per new IASB the business combinations should account goodwill in purchase method only. IAS 38 doesnot recognize internally generated goodwill as an asset because it cannot be measurable at cost  and identified.

2. bonds are debts and stocks are shares of ownership of the company. debt always contain guarantee with them either personal guarantee or asset given as a guarantee. stock holders have voting rights whereas bond holders doesnot have any voting rights. the dividend to the stock hoilders are paid only after the payment of interest to the bond holders. even the company suffers losses then the interest for the bonds should be paid. Generally stocks are high risk and highly rewarded whereas bonds are low risky and lower rewarded compared to stocks. bonds can be freely transferreed whereas stocks are not freely transferrable. even at the time of winding up of the company the bond holders are paid by sale of guaranteed assets and other assets prior to the payment of stock holders.

Before investing i want to know about the debt-equity ratio of the company, credit rating of the company, liquidity of the company and the guarantee given for repayments of the loans and the details of profit after tax and earnings availabe to equity share holders, cash flow statement of the company and the trend of the earning per shares for past 5 years.

If i am in my mid 50's and if i am going to invest 30% of my net worth and 50% of liquidilty then i would choose bonds instead of shares because of guaranteed income (intererst) and lower risk. even if the company got liquidated after my investment then i can get by investment back on the liquidation