CHapter 05 Allocation and Depreciation of Differences Between Implied and Book Values Acquisition

5
Allocation and Depreciation of

Differences Between Implied and
Book Values Acquisition
Advanced Accounting, Fifth Edition
Slide
5-1
Allocation of Difference Between Implied
and Book Values: Acquisition Date
When consolidated financial statements are prepared, asset

and liability values must be adjusted by allocating the
difference between implied and book values to specific
recorded or unrecorded tangible and intangible assets and
liabilities.
In the case of a wholly owned subsidiary, the implied value

of the subsidiary equals the acquisition price.
Slide
5-2
LO 1 Computation and Allocation of Difference.
Allocation of difference between implied and book values at

date of acquisition - wholly owned subsidiary.
Step 1: Difference used first to adjust the individual assets and

liabilities to their fair values on the date of acquisition.
Step 2: Any residual amount:
 Implied value > aggregate fair values = goodwill.
 Implied value < aggregate fair values = bargain. Bargain is

recognized as an ordinary gain.
Slide
5-3
LO 1 Computation and Allocation of Difference.
Bargain Rules under prior GAAP (before 2007 standard):

1. Acquired assets, except investments accounted for by the equity
method, are recorded at fair market value.
2. Previously recorded goodwill is eliminated.
3. Long-lived assets (including in-process R&D and excluding long-term

investments) are recorded at fair market value minus an
adjustment for the bargain.
4. Extraordinary gain recorded if all long-lived assets are reduced to

zero.
• Current GAAP eliminates these rules and requires an ordinary

gain to be recognized instead.
Slide
5-4
LO 2 FASB’s position on accounting for bargain acquisitions.
Bargain Rules: When a bargain acquisition occurs, under

FASB ASC paragraph 805-30-25-2, the negative (or credit)
balance should be recognized as an ordinary gain in the
year of acquisition. No assets should be recorded below
their fair values.
Note: A true bargain is not likely to occur except in

situations where nonquantitative factors play a role.
Slide
5-5
LO 2 FASB’s position on accounting for bargain acquisitions.
Allocation of Difference
Case 1: Implied Value “in Excess of” Fair Value – 100%

On January 1, 2013, S Company has common stock of $1,500,000 and retained
earnings of $500,000. the identifiable assets and liabilities as follows:
P Company acquires 100% interest in S Company on January 1, 2013 for S2,750,000.

1. Prepare Journal for Acquisition
2. Prepare Computation and allocation schedule!
3. Prepare elimination journal for investment as of January 1, 2013
4. Based on allocation schedule on 1., prepare allocation journal for the difference
to specific identifiable assets.
Slide
5-6
LO 4 Allocation of difference in a partially owned subsidiary.

1. Prepare Journal for Acquisition!
Investment $2,750,000
Cash $2,750,000
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5-7
Slide
5-8
Slide
5-9
Case 1: Acquisition Cost “Less Than” Fair Value (own < 100%)

P Company acquires 80% interest in S Company on January 1, 2013 for S2,200,000.

1. Prepare journal for acquisition.
Slide
5-10
Cash $2,750,000
Slide
5-11
Slide
5-12
Slide
5-13
Exercise Implied Value “in Excess of” Fair Value

E5-1: On January 1, 2010, Pam Company purchased an 85% interest in
Shaw Company for $540,000. On this date, Shaw Company had common
stock of $400,000 and retained earnings of $140,000. An examination of
Shaw Company’s assets and liabilities revealed that their book value was
equal to their fair value except for marketable securities and equipment:
Book Value Fair Value Difference
Marketable securities $ 20,000 $ 45,000 $ 25,000
Equipment 120,000 140,000 20,000
1. Prepare Journal for acquisition

Slide
5-14
Investment $540,000
Cash $540,000
85% 15% 100%
Parent NCI Total
Share Share Value
Purchase price and implied value $ 540,000 $ 95,294 $ 635,294
Book value of equity acquired:
Common stock 340,000 60,000 400,000
Retained earings 119,000 21,000 140,000
Total book value 459,000 81,000 540,000
Difference between implied and book value 81,000 14,294 95,294
Marketable securities (21,250) (3,750) (25,000)
Equipment (17,000) (3,000) (20,000)
Balance 42,750 7,544 50,294
Record new goodwill (42,750) (7,544) (50,294)
Balance $ 0 $ 0 $ 0
Slide
5-15
LO 4 CAD Schedule for less than wholly owned subsidiary.

Common stock 400,000
Retained earnings 140,000
Difference between Implied and Book 95,294
Investment in Shaw 540,000
Noncontrolling interest in Equity 95,294
4. Based on allocation schedule on 1., prepare allocation journal for the

difference to specific identifiable assets.
Marketable securities 25,000

Equipment 20,000
Goodwill 50,294
Slide
5-16

P Company acquires 80% interest in S Company on January 1, 2013 for 1,900,000.

Slide
5-17
Cash $1,900,000
Purchase value = $ 1,900,000

Book Value of Asset = $ 2,000,000
Implied Value = $ 1,900,000 / 80% = $ 2,375,000
The Different between Implied Value and Book Value = $ 375,000
Fair Value of Asset = $ 2,500,000 exceed from Implied Value by
$ 125,000
Slide
5-18
Slide
5-19
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5-20
Slide
5-21
Case 2: Acquisition Cost “Less Than” Fair Value

E5-1 (variation): On January 1, 2010, Pam Company purchased an 85%
interest in Shaw Company for $470,000. On this date, Shaw Company had
common stock of $400,000 and retained earnings of $140,000. An
examination of Shaw Company’s assets and liabilities revealed that their
book value was equal to their fair value except for marketable securities
and equipment:
Equipment 120,000 140,000 20,000
1. Prepare journal for acquisition

Slide
5-22
Investment $470,000
Cash $470,000
85% 15% 100%
Parent NCI Total
Share Share Value
Common stock 340,000 60,000 400,000
Total book value 459,000 81,000 540,000
Equipment (17,000) (3,000) (20,000)
Balance (excess of FV over implied value) (27,250) (4,809) (32,059)
Pam's gain 27,250
Increase noncontrolling interest to fair
value of assets 4,809
Total allocated gain 32,059
Balance 0 0 0
Slide
5-23



Equipment 20,000
Gain on acquisition 27,250
Noncontrolling interest in equity 4,809

Slide
5-24
Exercise Implied Value “in Excess of” Fair Value

E5-1: On January 1, 2010, Pam Company purchased an 85% interest in
Shaw Company for $540,000. On this date, Shaw Company had common
stock of $400,000 and retained earnings of $140,000. An examination of
Shaw Company’s assets and liabilities revealed that their book value was
equal to their fair value except for marketable securities and equipment:
Equipment 120,000 140,000 20,000
1. Prepare Journal for acquisition

Slide
5-25
Investment $540,000
Cash $540,000
85% 15% 100%
Parent NCI Total
Share Share Value
Common stock 340,000 60,000 400,000
Total book value 459,000 81,000 540,000
Equipment (17,000) (3,000) (20,000)
Balance 42,750 7,544 50,294
Record new goodwill (42,750) (7,544) (50,294)
Balance $ 0 $ 0 $ 0
Slide
5-26
LO 4 CAD Schedule for less than wholly owned subsidiary.



Equipment 20,000
Goodwill 50,294
Slide
5-27
Case 3: Implied Value “Less Than” Book Value and “Less Than” Fair Value

P Company acquires 80% interest in S Company on January 1, 2013 for 1,500,000.

Slide
5-28
Cash $1,500,000
Purchase value = $ 1,500,000

Book Value of Asset = $ 2,000,000
Implied Value = $ 1,500,000 / 80% = $ 1,875,000
The Different between Implied Value and Book Value = - $ 125,000
Fair Value of Asset = $ 2,500,000 exceed from Implied Value by
$ 625,000
Slide
5-29
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5-30
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5-31
Slide
5-32
Effect of Allocation and Depreciation of Differences on
Consolidated Net Income: Year Subsequent To Acquisition
When any portion of the difference between implied and

book values is allocated to depreciable and amortizable
assets, recorded income must be adjusted in determining
consolidated net income in current and future periods.
Adjustment is needed to reflect the difference between

the amount of amortization and/or depreciation recorded
by the subsidiary and the appropriate amount based on
consolidated carrying values.
Slide
5-33

P Company acquires 80% interest in S Company on January 1, 2013 for $2,200,000.

Book Value of S Company is $ 2,000,000
Implied Value = $2,200,000 / 80% = $2,750,000
The Different between Implied Value and Book Value is $ 750,000
Slide
5-34
The Different between Implied Value and Book Value is $ 750,000 is allocated as
follows:
Slide
5-35
Comparison of the recorded and consolidated carrying value of the asset and
liabilities of S Company on January 1, 2013 as bellows:
Slide
5-36
Assume now that all the inventory is sold during 2013and he equipment has a
remaining life od 10 years from January 1, 2013, adjustment in the computation of
consolidated net income that result from the allocation, and depreciation of the
different between implied value and book value are summaries as follow:
Slide
5-37
Slide
5-38
Assignment 1
Slide
5-39
Assignment 2
Slide
5-40
Copyright
Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act without
the express written permission of the copyright owner is
unlawful. Request for further information should be addressed
to the Permissions Department, John Wiley & Sons, Inc. The
purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.
Slide
5-41

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5

Allocation and Depreciation of

Advanced Accounting, Fifth Edition

When consolidated financial statements are prepared, asset

In the case of a wholly owned subsidiary, the implied value

Allocation of difference between implied and book values at

Step 1: Difference used first to adjust the individual assets and

Step 2: Any residual amount:

 Implied value > aggregate fair values = goodwill.

 Implied value < aggregate fair values = bargain. Bargain is

Bargain Rules under prior GAAP (before 2007 standard):

2. Previously recorded goodwill is eliminated.

3. Long-lived assets (including in-process R&D and excluding long-term

4. Extraordinary gain recorded if all long-lived assets are reduced to

• Current GAAP eliminates these rules and requires an ordinary

Bargain Rules: When a bargain acquisition occurs, under

Note: A true bargain is not likely to occur except in

Case 1: Implied Value “in Excess of” Fair Value – 100%

P Company acquires 100% interest in S Company on January 1, 2013 for S2,750,000.

Case 1: Implied Value “in Excess of” Fair Value – 100%

Case 1: Implied Value “in Excess of” Fair Value – 100%

3. Prepare elimination journal for investment as of January 1, 2013

Case 1: Implied Value “in Excess of” Fair Value – 100%

On January 1, 2013, S Company has common stock of $1,500,000 and retained

P Company acquires 80% interest in S Company on January 1, 2013 for S2,200,000.

3. Prepare elimination journal for investment as of January 1, 2013

Exercise Implied Value “in Excess of” Fair Value

1. Prepare Journal for acquisition

3. Prepare elimination journal for investment as of January 1, 2013

4. Based on allocation schedule on 1., prepare allocation journal for the

Marketable securities 25,000

On January 1, 2013, S Company has common stock of $1,500,000 and retained

P Company acquires 80% interest in S Company on January 1, 2013 for 1,900,000.

Purchase value = $ 1,900,000

3. Prepare elimination journal for investment as of January 1, 2013

Case 2: Acquisition Cost “Less Than” Fair Value

1. Prepare journal for acquisition

Common stock 400,000

4. Based on allocation schedule on 1., prepare allocation journal for the

Marketable securities 25,000

Difference between Implied and Book 12,941

Exercise Implied Value “in Excess of” Fair Value

1. Prepare Journal for acquisition

3. Prepare elimination journal for investment as of January 1, 2013

4. Based on allocation schedule on 1., prepare allocation journal for the

Marketable securities 25,000

On January 1, 2013, S Company has common stock of $1,500,000 and retained

P Company acquires 80% interest in S Company on January 1, 2013 for 1,500,000.

Purchase value = $ 1,500,000

3. Prepare elimination journal for investment as of January 1, 2013

When any portion of the difference between implied and

Adjustment is needed to reflect the difference between

On January 1, 2013, S Company has common stock of $1,500,000 and retained

P Company acquires 80% interest in S Company on January 1, 2013 for $2,200,000.

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