Acquisition of Assets - solution
Before the Acquisition of Assets
PA Corp.
(the acquiring
company)
Sun Inc.
(the selling
company)
After Acquisition
PA Corp.
(the acquiring
company)
Sun Inc.
(the selling
company)
1. PA Corp. purchases the noncash assets of Sun Inc. $120 M.
Sun Co.
Cash
Assets
Gain on sale of assets
Liabilities
Cash
debit
credit
120
99
21
60
60
Sun Inc. Balance Sheet after combination and payment of liabilities:
Cash
61
Common Stock
20
Retained Earnings
41
61
Could be liquidated or could use cash to engage in other business activities.
PA Corp.
debit
Assets
Cash
120
credit
120
No goodwill recorded because PA Corp. acquired only the assets and did not buy the company.
Therefore, the amount paid would be assumed to be the fair market value and would be assigned
to the assets acquired.
106749782
Page 1
Acct 415/515
Dr. Teresa Gordon
Acquisition of Common Stock – CASH (solution)
Before the Business Combination
PA Corp.
(the acquiring
company)
After the
Business
Combination
Sun Inc.
(the target
company)
PA Corp.
(the parent
company)

Sun Inc.
(the subsidiary
company)
2. PA Corp. acquires Sun Inc. by paying $55 M in cash to purchase all the
outstanding common stock. Sun Inc. becomes a subsidiary of PA Corp.
Sun Inc. - No impact on its books, money is paid directly to its stockholders.
PA Corp.
Investment in Sun Inc.
Cash
debit
credit
55 M
55 M
Conceptual Analysis of Purchase Price:
Book value component
(Sun’s Common Stock & Retained Earnings)
Excess value of identified assets
(Patent is worth $9 M more than book value – this amount would
be amortized over the patent’s remaining economic life)
Goodwill element
(Purchase price less book value less excess fair value of
identifiable assets)
40 M
9M
6M
55 M
Page 2
Acct 415/515
Dr. Teresa Gordon
Acquisition of Common Stock - EXCHANGE OF STOCK (solution)
After the
Before the Business Combination
Business
Combination
Sun Inc.
(the acquiring
company)
PA Corp.
20,000,000 s/s =>
40,000,000 s/s Sun
@ $25 ea=$1,000M
Sun Inc.
(the parent
company)

PA Corp.
(the subsidiary
company)
3. Sun Inc. acquires 100% of PA Corp. by exchanging 2 shares of its own common
stock for each share of PA Corp. common stock in a business combination. PA
Corp. becomes a subsidiary of Sun Inc.
PA Corp. books are unaffected. PA Corp.’s former stockholders are now
stockholders of Sun Inc.
Sun Inc.
debit
Investment in PA Corp.
Common Stock (40,000,000 shares)
Additional paid in capital
1,000
credit
400
600
Conceptual Analysis of Purchase Price:
Book value component
(PA Corp. Common Stock & Retained Earnings)
500 M
Excess value of identified assets
(Plant assets are worth $600 M more than book value – this amount would
be depreciated over the assets’ remaining economic lives)
600 M *
Goodwill element
(Purchase price less book value less excess fair value of
identifiable assets)
-100 M *
1000 M
To eliminate the ‘bargain purchase element, the fair values of the noncurrent assets would be
reduced proportionately.
CONSOLIDATED FINANCIAL STATEMENTS WILL BE PREPARED
Page 3
Acct 415/515
Dr. Teresa Gordon
Statutory Merger - solution
After the
Business
Combination
Before the Business Combination
PA Corp.
(the acquiring
company)
Sun Inc.
2,000,000 s/s =>
1,000,000 s/s PA @
$50 + $3 = $53 M
PA Corp.
(the surviving
company)
4. PA Corp. acquires 100% of Sun Inc. by exchanging 1 share of its own common
stock for each 2 shares of Sun Inc. common stock in a statutory merger. Direct
costs in connection with the acquisition are $3 M.
Sun Inc.
debit
Common stock (2,000,000 s/s)
Retained Earnings
Liabilities
Assets
credit
20 M
20 M
60 M
100 M
Sun does not survive – books are closed.
Conceptual Analysis:
Book value of Sun’s net assets
Excess value of patent
Fair value of Sun’s net assets
Purchase price
Goodwill =
PA Corp.
$40
9
$49
53
$ 4
debit
credit
Purchase price = (1,000,000 s/s * $50) + $3 M direct costs = $53 M
Assets (including cash)
Goodwill
Liabilities
Common stock (1,000,000 s/s * $10)
Additional paid in capital
Cash
109 M
4M
$113 M
60 M
10 M
40 M
3M
$113 M
Page 4
Acct 415/515
Dr. Teresa Gordon
Statutory Combination - solution
Before the Business Combination
PA Corp.
After the
Business
Combination
Sun Inc.
2,000,000 s/s ==>
2,000,000 IS at $25
each = $50 M
Integrated
Sunpacon
5. PA Corp. and Sun Inc. enter into a statutory combination agreement. A new entity called
Integrated Sunpacon (IS) is formed. Each former stockholder of PA Corp. receives two shares of
IS stock and each former stockholder of Sun Inc. receives one share of IS stock for each share of
stock they own. Immediately after the combination, the $1 par value IS stock is traded at $25 per
share.
PA Corp. and Sun Inc. both cease to exist -- all accounts are closed.
Integrated Sunpacon
debit
credit
If we assume that PA Corp. as the larger entity is the acquiring company, its assets would be
transferred to the new entity at carrying values while the assets of Sun Inc. would be transferred
at fair values.
Cash (1 + 190)
Current assets (5 + 300)
Plant assets (90 + 400)
Other assets (4 + 10 + 9 excess value)
Goodwill (see below)`
Liabilities (60 + 400)
Common stock (42,000,000 s/s * $1 par)
Additional paid in capital (to balance)
Retained earnings (PA Corp.)
191 M
305 M
490 M
23 M
1M
460 M
42 M
208 M
300 M
1,010 M
1,010 M
Note - Equity of new company is carrying value of PA Corp.’s equity ($500) + market value of
acquired company ($50). [42 + 208 + 300]
Conceptual Analysis of Purchase Price:
Book value component (Sun’s Common Stock & Retained Earnings)
Excess value of identified assets
(Patent is worth $9 M more than book value – this amount would
be amortized over the patent’s remaining economic life)
Goodwill element
(Sun is acquired by purchase of 2,000,000 shares at $25)
40 M
9M
1M
50 M
Page 5
Acct 415/515
Dr. Teresa Gordon
Formation of a Holding Company - solution
Before the Business
Combination
PA Corp.
After the Business
Combination
Sun Inc.
Integrated
Sunpacon
(the parent
company)

|
|
PA Corp.
(a subsidiary
company)
Sun Inc.
(a subsidiary
company)
6. Integrated Sunpacon (IS) is formed to be a holding company. It exchanges 2
shares of its $10 par value stock for each share of PA Corp. common stock and 1
share for each share of Sun Inc. common stock. Costs associated with SEC filings
related to the IS stock is $2 M.
The former stockholders of PA Corp. and Sun Inc. are now stockholders of IS.
Integrated Sunpacon
Investment in PA Corp. (mkt.)
Investment in Sun Inc. (mkt.)
Common stock (42,000,000 * $10 par)
Additional paid in capital
DEBIT
CREDIT
1,000 M
50 M
420 M
630 M
Note: could instead be considered acquisition of one by the other in which case only one entity’s
assets would be ‘stepped up’.
Page 6