CHAPTER 9:
Liabilities, Equity,
and Corporate
Groups
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CHAPTER 9
Liabilities, Equity, and Corporate Groups
Main topics in Chapter 9:

Current liabilities;
 Non-current liabilities;
 Equity (reinforcing material from chapters 2 and 3);
 Complex financial structures;
 Several topics on corporate groups:
a)
b)
c)
d)
Intercorporate investments;
Joint ventures;
Acquisitions and purchase method consolidation;
Mergers and pooling of interests consolidation.
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Legal Debts
• Debts are shown at the historical value that arose when
the debt was incurred. This is usually the same
amount that will actually be paid.
• Debt values do not include future interest, inflation,
and do not fluctuate with market value changes.
• Footnotes usually contain details about important
debts, especially the non-current ones.
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Current Liabilities
Current liabilities are debts or estimated claims that are realizable
within one operating cycle or one year (whichever is shorter).
Examples include the following:
• Accrued liability estimates including interest, pensions,
warranties, income taxes payable, etc.
• Current portion of non-current debts which is only the principal
portion of next year’s payments
• Revenue collected before it is earned which is referred to as
deferred revenue or customer deposits
• Various miscellaneous credit balance accounts
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Non-current Liabilities
Non-current liabilities are expected to be repaid or otherwise
removed more than one year in the future.
Examples include the following:
• Long-term debts are due more than a year into the future.
Examples include mortgages, conditional sales contracts, and
capital leases.
• Discounts and premiums on non-current debts (usually bonds)
which arise from the difference between the bonds’ stated
interest rates and market rates at the date of issue of the bonds.
• Long-term accruals, which are essentially just longer-term
versions of short-term accruals.
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Discounts or Premiums on Non-current Debts
Discounts and premiums result from differences
between bonds’ stated interest rates and market rates
at the date of issue of the bonds. The discount or
premium works as a contra account and is included
with the legal debt on the balance sheet.
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Discounts or Premiums on Non-current Debts
A discount arises when the prevailing market rate is greater than the
stated rate. (These bonds will therefore have been issued at less than
their face amount.)
Example:
If a company issues $100,000 in bonds at an interest rate of 9% (with
a current market rate of 11%), investors will only be interested if the
bonds are sold at a discount to compensate for the low interest rate.
Suppose the present value of the bonds at 11% is $92,608:
J/E
Cash (proceeds)
Discount on bonds
Bonded debt liability
92,608
7,392
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100,000
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Discounts or Premiums on Non-current Debts
A premium arises when the prevailing market rate is less than the
stated rate. (These are attractive bonds, so they will have been
issued at an amount greater than their face value.)
Example:
If a company issues $100,000 in bonds at an interest rate of 9% (with
a current market rate of 8%), the bonds will be issued at a premium
to compensate the issuing company for the interest rate discrepancy.
Suppose the present value of the bonds at 8% is $103,990.
J/E
Cash (proceeds)
Premium on bonds
Bonded debt liability
103,990
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3,990
100,000
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Discounts or Premiums on Non-current Debts
Why is this done?





When a company issues a bond other than with the market rate, it
still must effectively pay the market rate
For a discounted bond, the company receives less money than
the face value of each bond (e.g. $92,608 instead of $100,000)
But, because the coupon rate of the bond is only 9%, the
company still pays $9000 a year in interest (coupon) payments
The market demanded 11%, so effectively, the interest expense is
higher
Amortizing the discount thus converts the interest expense from
9% to the 11% market rate
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Discounts or Premiums on Non-current Debts
• To deal with the discount or premium, we amortize it
over the life of the bond to match the interest
expenses. Effectively, the overall expense (interest +
amortization) creates the same expense as would
have arisen had the bonds been issued at the market
rate.
• If there is a discount, the company gets less than the
face value for the bonds, so its interest rate on what it
did get is higher than the coupon rate. Opposite for a
premium. © 2007 by Nelson, a division of Thomson Canada Limited.
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Long-Term Accruals
Long-term accruals are in principle just
longer-term versions of short-term accruals.
Examples of long-term accruals include:
a) Warranty liability: the estimated future cost of
providing warranty services for products already sold.
DR Warranty expense
CR Warranty liability
Match the expense to the
revenue when product sold
DR Warranty liability
CR Cash, replacement parts, etc.
When a warranty is
honoured
Long-Term Accruals
b) Pension liability: the estimated future cost of providing
pensions for work already done by employees.
DR Pension expense
CR Pension liability
DR Pension liability
CR Cash
When the employee earns
the entitlement
When a payment is made
to a trustee or directly to a
retired employee
c) Post-employment benefits other than pensions:
accounted for in the same way as pension obligations.
Pension Liability

The cost of providing future pensions minus the
cash already paid to the pension trustee (the
trustee invests the company’s contributions and is
responsible for dispersing it to employees).
 Liability needs to be continuously adjusted to
reflect estimated changes to amounts needed.
 When the pension is overfunded, the company can
take back this money to improve its financial
position.
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Income Tax Accounting
What’s the problem?
Companies have to pay income tax…
…but it is assessed according to tax rules,
not necessarily according to GAAP.
So we have a difference between:
Tax payable to the government, as assessed
(estimated) for the current year
Tax you’d expect if you applied the company’s
effective tax rate to the GAAP Income Statement
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Income Tax Accounting
What should we do about the difference?
1) Nothing? (“tax payable” method)
• Then you get a mismatch between income tax
expense (done according to tax law) and the rest
of the Income Statement (which follows GAAP)
2) Just account for past differences between tax
assessment and GAAP Income Statement (“tax
allocation: deferral” method)
3) Estimate future taxes likely to be paid on the basis
of GAAP income and record that (“tax allocation:
liability” method)
Income Tax Accounting
GAAP
Use method #3 above (recent change from #2 above)
a
DR Current portion of income tax expense
CR Income tax payable (based on estimated
current tax assessment)
b
DR Future portion of income tax expense
CR Future tax liability (based on estimate of
future tax that will have to be paid)
Income Tax Accounting
GAAP
•Each year, (a) any adjustments needed to actual tax
payable go to the current portion of expense and (b)
any adjustments to future tax liability (or any future
tax asset) go to the future portion of expense.
•Both current and future income tax expense can be
either a debit or credit in any given year depending on
the circumstances (that is, whether adjustments are
needed to current or future portions of the tax).
•Future tax expense is a non-cash expense and so is
added back on cash flow statement just like
amortization.
Income Tax Accounting
Main reason for the difference is in amortization:
• Capital cost allowance (CCA) for calculating tax
payable is an accelerated amortization method, to
give taxpayers tax savings early in assets’ lives and
encourage reinvestment in assets.
• Book amortization is usually less than CCA
• So, much of the future tax liability =
(CCA – Book Amortization) * expected tax rate
Let’s do an example to illustrate income tax expense
and future tax liability….
Plasticorp Ltd.
At the end of 2003, Plasticorp Ltd. had future income tax
liability of $2,417,983 and retained earnings of
$21,788,654. For 2004, the company’s income statement
showed income before tax of $1,890,004 and amortization
expense of $3,745,672. Inspection of the company’s
income tax records showed that in 2003, $75,950 of its
revenue was not subject to income tax, $43,211 of its
expenses were not deductible and its capital cost
allowance was $3,457,889. The company’s income tax
rate for 2004 was 35% and is expected to remain at that
rate indefinitely. The company declared and paid a
$500,000 dividend in 2004.
1) Calculate the following:
a. Current portion of income tax expense for 2004:
Current portion of tax expense:
Income before tax
Minus non-taxable revenue
Add back non-deductible expenses
Add back amortization
Deduct capital cost allowance
Taxable income
$1,890,004
(75,950)
43,211
3,745,672
(3,457,889)
$2,145,048
Current tax = $2,145,048 * 35% = $750,767
1) Calculate the following:
b. Future portion of income tax expense for 2004:
Method 1:
($3,457,889 - $3,745,672) * 0.35 = ($100,724)
Method 2:
Total tax expense
=($1,890,004 - $75,950 + $43,211) * 0.35
=$650,043
Future portion
=$650,043 - $750,767 (current portion)
=($100,724)
1) Calculate the following:
c. Net income for 2004:
=$1,890,004 - $650,043 total tax expense
=$1,239,962 net income
d. Future income tax liability at the end of 2004:
=$2,417,983 + ($100,724)
=$2,317,259
e. Retained earnings at the end of 2004:
=$21,788,654 + $1,239,961 - $500,000
=$22,528,615
2) Suppose expectations of future income taxes to be
paid changed a little in 2004, so that the estimated
future income tax liability at the end of 2004 is now
$2,340,540. Using the recently revised Canadian
GAAP for income tax allocation, provide the five
numbers asked for in part 1:
a. Current portion of income tax expense for 2004:
No change from Part 1 ($750,767)
b. Future portion of income tax expense for 2004:
=$2,340,540 - $2,417,983
=($77,443)
2) Suppose expectations of future income taxes to be
paid changed a little in 2004, so that the estimated
future income tax liability at the end of 2004 is now
$2,340,540. Using the recently revised Canadian
GAAP for income tax allocation, provide the five
numbers asked for in part 1:
c. Net income for 2004:
=$1,890,004 – ($750,767 + ($77,443))
=$1,216,680
2) Suppose expectations of future income taxes to be
paid changed a little in 2004, so that the estimated
future income tax liability at the end of 2004 is now
$2,340,540. Using the recently revised Canadian
GAAP for income tax allocation, provide the five
numbers asked for in part 1:
d. Future income tax liability at the end of 2004:
Future income tax liability is the new estimate,
$2,340,540
e. Retained earnings at the end of 2004:
=$21,788,654 + $1,216,680 - $500,000
=$22,505,334
Equity
What’s the problem?
Equity is fundamental to any type of organization, but
different types of organizations exist. How are we to
recognize equity?
The Solution:
Different recognition methods exist for
unincorporated, incorporated, and non-business
organizations.
Let’s look at these methods….
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Equity: Unincorporated Businesses versus
Incorporated Businesses
Unincorporated Businesses
• No legal separation between business and owners.
• Accounting principles exist for unincorporated
businesses. Because of double-entry accounting and
the articulation of the income statement and balance
sheet, practices for assets, liabilities, revenues, and
expenses affect equity too, directly or indirectly.
The following are a set of principles to be followed for
Unincorporated Businesses…
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Unincorporated Business Principles
• Unincorporated businesses have generally similar
assets and liabilities to those of corporations.
• Five main liability differences do exist, some of
which affect the accounting for equity too:
(1) They cannot issue debt to the public, so you will
not see bonded debt on the balance sheet.
(2) Any sort of secured debt is really a debt of the
owner (or owners, for a partnership).
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Unincorporated Business Principles
• Five main liability differences (continued)
(3) Any investment by the owner (or owners, in the
case of a partnership) is just included in equity.
There is no such thing as an owner’s loan to the
business.
(4) The business cannot declare a dividend, so there
is no such thing as dividends payable. Any
payments to the owner(s) are just deducted from
equity when made.
(5) The business is not subject to income tax.
Income tax is a personal obligation of the
owner(s).
Unincorporated Business Principles
• There is no income tax expense and there is no
expense for owner’s (or owners’) wages or salaries.
Any payments for income tax or to owners are
deducted from equity, not shown as business
expenses.
• The balance sheet has a simple equity section called
Capital. It is calculated as:
Beginning capital
+ New investment by owner(s)
+ Income for the year (or minus loss)
– Withdrawals by owner(s)
= Ending capital
Unincorporated Business Principles
• There may be a statement of owner’s (or owners’)
capital changes and for a partnership there is usually
a statement or analysis of the partners’ individual
capital accounts.
• Footnotes, financial statement titles, and account
names are usually used to explain the business’s
relationship to the owner(s).
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Equity: Unincorporated Businesses versus
Incorporated Businesses
Incorporated Businesses
(1) Legal Requirements:
• Dividends are paid out of income, not invested
capital.
• Share capital is the amount directly contributed by
shareholders.
• Companies may have several classes of shares that
are disclosed separately on the balance sheet or in a
note.
• Retained earnings shows the accumulated income
minus dividends declared since incorporation.
Equity: Unincorporated Businesses versus
Incorporated Businesses
Incorporated Businesses
(2) Shareholder loans and other complex issues:
• Shareholders can be creditors too (liability for loans
by shareholders; dividends payable).
• Some securities are a mixture of debt and equity.
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Equity: Unincorporated Businesses versus
Incorporated Businesses
Incorporated Businesses
(3) Treasury Shares
• Record at cost (usually average cost).
• Deduct from equity, as we already know:
• To avoid double-counting assets, which would
happen if they were added to the assets, in
which they represent an interest.
• To show the net voting equity (when the
company owns its own shares, they do not vote).
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Equity: Unincorporated Businesses versus
Incorporated Businesses
Incorporated Businesses
(4) Foreign currency translation
• An adjustment to make the accounts balance when
they have been converted to Canadian dollars using
various methods.
• There is a proposal to move this item to the income
statement.
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Equity: Unincorporated Businesses versus
Incorporated Businesses
Incorporated Businesses
(5) Share splits and stock dividends
• A split is when the corporation’s shares are divided
into twice or three times as many shares, so that their
smaller value may be easier for investors to purchase
(no accounting entry is needed).
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Equity: Unincorporated Businesses versus
Incorporated Businesses
Incorporated Businesses
(5) Share splits and stock dividends
• A stock dividend is when the board of directors
decides to issue some new shares (a small percentage
of those already outstanding) to the shareholders
instead of paying a cash dividend. Then an entry is
needed:
DR Retained Earnings
CR Share Capital
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Non-Business Organizations
• Governments, clubs, churches, charities, etc.
• Typically have different accounting for equity
because they don’t have owners, share capital,
dividends, and other business trappings.
• Generally, non-business organizations have equity
sections that are simpler than corporations,
calculated as total assets minus total liabilities.
• Complexities exist; thus fund accounting has been
developed to assist with this problem. The basic goal
of fund accounting is to separate the organization
into segments that are accounted for separately.
Complex Financial Structures
Some liabilities and equity are more difficult to fit into the
double-entry GAAP model of financial accounting…
Financing that is a mixture of Equity and Debt
• Convertible shares or bonds are securities that can be
converted into another type of security at the choice of
the holder.
• Redeemable shares can either be bought back from the
holder by the company, or can be sold back to the
company by the holder making it a little like debt.
• Term preferred shares may “come due” at a given date,
making them also a little like debt.
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Complex Financial Structures
Commitments and Contingencies
• Corporations often make a commitment to issue further
shares under certain conditions (usually not recorded,
instead disclosed as footnotes if material), e.g.:
• Warrants are issued with shares and give the holder
the right to buy more shares at a specified price.
• Stock options are often awarded to management to
buy shares at a specified price (form of incentive).
• Contingencies are economic events (often negative) that
are in the process of occurring and are net yet resolved
• Interesting problem with lawsuits – Does disclosure
admit guilt??
40
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Stock Options

Companies give options to employees or executives as
a form of performance compensation since there is an
incentive to boost the share price.
 A company share may be trading for $4. The company
gives stock options with a strike price of $5. This
means that if the company’s stock rises above $5
sometime in the future, the employee can exercise the
option, buy the shares at $5 and immediately resell
them at a higher price, making an instant profit.
 In the past, this gain for the employee was not
recorded as a compensation expense.
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Accounting for Stock Options

Journal entries to expense a stock option when
granted to buy a share for $5. Can be exercised
after the share price passes $20.
Grant date: DR Expense
CR Option liability
15 (?)
15 (?)
Exercise date: DR Option liability
15 (?)
DR Cash
5
CR Share capital
20 (?)
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Complex Financial Structures
Off-Balance-Sheet Financing and Contractual Obligations
5 examples of financing that may or may not be well
reported in the balance sheet and/or notes include:
• Ordinary “operating” rental and leasing contracts.
• The sale of rights to collect accounts receivable so as to
speed up the cash flow, known as factoring receivables.
• Making long-term purchase commitments to get
favourable prices or other advantages.
• Making commitments for abnormal expenditures.
• Using subsidiary companies to borrow money so it
doesn’t show up on the parent company’s balance sheet.
Complex Financial Structures
Financial Instruments
Financial instruments refers to a company’s set of
financial assets and liabilities, whether they are
recognized or not. Examples include:
• Cash and equivalents, accounts receivable, some
investments, and “substantially all current liabilities and
long-term borrowings.”
• Derivative financial instruments including “revenue
hedges”, “currency swaps”, and “interest rate hedges.”
There are endless kinds of financial instruments that exist,
and innovations in instruments happen practically daily…
Corporate Groups
Intercorporate Investments
What’s the problem?
• There exists groups of legally separate, but
economically interdependent companies.
• They are connected by various ownership
arrangements.
• Accrual accounting tries to account for the economic
reality.
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Nature and Intent of
the Investment
Place on the
Investing
Company’s B/S
Accounting
Method
1. Temporary use of
cash
Marketable securities
Lower of cost
or market
2. Long-term passive
Noncurrent assets
Cost investment
3. Long-term active
Noncurrent assets
Equity basis
investment
4. Joint venture
Noncurrent assets
Equity basis
Combined B/S
Purchase basis
(consolidation)
5. Acquisition of one
company by another
6. Merger: no such
thing anymore
Now accounted for as an acquisition
Illustration of a Corporate Group
B
D
C
Group A
E
A
F
G
H
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Reading the Previous Illustration
• Corporation A is the main company in Group A, an economic
entity and encompassing the separate corporate legal entities
• A owns all of the voting shares of C and E: they are entirely
part of Group A and are combined in A’s financial statements
• A owns more than 50% of the voting shares of F and G, so they
are consolidated too, but some accounting has has to be made
for the parts of them A does not own
• A does not control D but has significant influence over it, so it
will be accounted for as a long-term active investment (equity)
• A has no significant portion of B or H, so they will be
accounted for as passive investments
Long term nonconsolidated investments
The company we’re doing the accounting for owns
less than 50% of another company, so it does not
legally control the other company
But under GAAP:
• If it owns >20%, it is considered an “active”
investment: expected to try to influence the investee
• If it owns <20%, it is considered a “passive”
investment: just an investment like any of us would
make in a company, assumed not enough to have
much influence on the investee’s performance
So, there are two accounting methods for
nonconsolidated investments
Both show the investment on the balance sheet as a
non-current asset.
Cost basis (<20% owned)
• Balance Sheet - Cost of investment is the original
cost and never changes (unless its value drops and
the asset is then written down as permanently
impaired, which could happen to any investment)
• Income Statement - Income is just whatever
dividends the investing company gets
So, there are two accounting methods for
nonconsolidated investments
Both just show the investment on the balance sheet as
a non-current asset.
Equity basis (>20%, <50%)
• Balance Sheet – Start with the original cost
• Add our share of investee’s earnings (treats the
asset account like an account receivable)
• Deduct any dividends we receive (as we would
if it were an account receivable being collected)
• So the B/S account = original cost + our share of
investee’s change in RE (income-dividends)
So, there are two accounting methods for
nonconsolidated investments
Both just show the investment on the balance sheet as
a non-current asset.
Equity basis (>20%, <50%)
• Income Statement – Our share of investee’s earnings
(sort of accruing the return we expect to get
eventually)
Let’s do a quick example….
Ingram Inc. owns 34% of the voting shares of Bargain
Books Ltd. It bought them last year for $2,250,000,
and since then, Bargain Books has reported net income
of $675,000 and declared dividends totaling $300,000.
Ingram accounts for its investment in Bargain Books
on the equity basis.
1. What is the revenue Ingram will have recognized
from its investment since acquisition?
=$675,000 * 34%
=$229,500
2. What is the present balance in the company's balance
sheet account for investment in Bargain Books Ltd.?
Initial Investment
Share of income (above)
Less dividends ($300,000 * 34%)
Present balance
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$2,250,000
229,500
(102,000)
$2,377,500
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3. What are the journal entries since acquisition?
DR Investment in Bargain Books
CR Investment Revenue
229,500
229,500
Also,
DR Cash
102,000
CR Investment in Bargain Books
102,000
Now, for comparison, answer the same questions as if
Ingram accounted for its investment on the cost basis.
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1. What is the revenue Ingram will have recognized
from its investment since acquisition?
Revenue equals dividends received = $102,000
2. What is the present balance in the company's balance
sheet account for investment in Bargain Books Ltd.?
The investment account would remain unchanged at
$2,250,000.
3. What is the journal entry?
DR Cash
102,000
CR Investment Revenue
102,000
Consolidation
Ignoring joint ventures (accounted for something like
partnerships), accounting for the remaining investment
involves combining the financial statements of a group
of corporations into one set of consolidated statements
representing the group.
These methods represent:
Acquisition by one corporation of another
The corporate group is reflected as an economic unit, not a
unitary legal entity…
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Acquisition by One Corporation of Another
Purchase Method Consolidation
• One corporation owns more than 50% of the voting
shares of another corporation
• The majority owner can operate the two companies
jointly and gain benefits from the coordination
• Consolidation is used to present the two companies
as one economic entity
• The “parent” company controls the subsidiary
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Acquisition by One Corporation of Another
Purchase Method Consolidation
• GAAP requires the Purchase Method of accounting
for acquisitions
• Purchase Method: a method of determining
consolidated financial statement figures by adding
the assets and liabilities of the subsidiary to the
parent company at fair values. Differences between
the portion of the sum of fair values acquired by the
parent and the total price paid is accounted for as
“goodwill” © 2007 by Nelson, a division of Thomson Canada Limited.
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Acquisition by One Corporation of Another
Problem:
We represent a group as if it were one company. So:
(1) Eliminate all intercompany account balances
(including the subsidiary’s equity and all
intercompany revenues and expenses)
(2) Equity is the parent company’s equity only
(3) Balance sheet values are all from the parent’s
point of view
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Acquisition by One Corporation of Another
3 basic adjustments to make at date of acquisition
(things get more complex at later dates):
1) Noncontrolling (minority) interest
2) Balance sheet asset and liability values
3) Goodwill arising on consolidation
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Noncontrolling (minority) interest
What is it and when does it occur?
• The parent company does not own 100% of the
subsidiary’s voting shares
• The MI amount equals the percentage of the voting
shares not owned by the parent times the subsidiary’s
shareholders’ equity at the date of acquisition
• It represents someone else’s equity, that of people
other than the parent corporation
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Noncontrolling (minority) interest
Where and how is it recorded?
• It is recorded as a liability on the balance sheet
• At the date of acquisition, minority interest liability
is credited with the book value of the minority’s
share of the subsidiary’s equity
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Noncontrolling (minority) interest
Where and how is it recorded? (cont.)
• When the subsidiary earns income, the minority’s share of
that income is credited to minority interest liability and
minority interest expense is debited (the opposite if the
subsidiary has had a loss)
• MI Liability increases (and consolidated net income
decreases) each year by the minority owners’ share of the
subsidiary’s net income, and it decreases (and consolidated
cash decreases) whenever the minority owners receive a
dividend
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Balance sheet asset and liability values
Note:
• Intercompany balances are ignored (e.g. parent’s
investment in subsidiary, subsidiary’s equity, any
intercompany accounts receivable or payable)
• Consolidated equity at date of acquisition equals just the
parent's equity alone
• Balance sheet accounts are valued at parent’s valuation (fair
values)
• Minority’s portion is not taken into account in revaluing the
subsidiary's assets and liabilities to fair values
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Balance sheet asset and liability values
The assets and liabilities of the subsidiary are added into
the consolidated figures using the following formula:
Amount used in consolidation calculation:
Book value
in
=
+
subsidiary’s
B/S
Parent’s
(Fair value –
portion of x subsidiary’s book
subsidiary
value)
e.g. 100 (BV) + [80% * (125 (FV) – 100 (BV)] = 120
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Goodwill Arising on Consolidation
What is it?
• The difference that arises between what was paid and
what the parent received
• It is a noncurrent asset and is amortized over time by
charges against consolidated income
e.g., $3 million is paid for 80% of the voting shares of
company ABC. The assets have a fair value sum of $7 million
and the liabilities have a fair value sum of $4.5 million.
Calculate the goodwill…
Goodwill= ©$3
– [80% * ($7 - $4.5)] = $1 million
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Illustrating the Purchase Method
Goodwill
Fair value – book value
Ignore (only show
the BV for the
minority interest)
Goodwill
Minority’s
noncontrolling
interest
Parent’s
portion
Fair value – book value
© 2007 by Nelson, a division of Thomson Canada Limited.
69
What are the effects on the Income Statement?
Consolidated net income = Income earned since acquisition with
adjustments
Start with sum of the parent’s and the subsidiaries’ incomes
Subtract:
A) Any profits earned by intercompany sales
B) Any income from the subsidiaries already included in the
parent's or other subsidiaries’ accounts through use of the equity
method of accounting on the companies’ individual financial
statements
C) Amortization and other expenses resulting from adjusting
subsidiaries’ assets and liabilities to fair value
D) Noncontrolling owners’ share of the net income earned by the
subsidiary of which they remain part owner
E) Amortization of any goodwill arising on consolidation
Example of Purchase Method
Beaver Ltd. bought 70% of the voting shares of Eagle
Inc. At the date of acquisition, the book values and
fair values of Eagle’s accounts were as follows:
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71
Example of Purchase Method
Eagle's Data
Cash & equivalents
Other current assets
Non-current assets
Accounts payable
Other current liab.
Non-current liab.
Equity
Net assets fair value
Book Values Fair Values
$7,000
$7,000
29,000
26,000
96,000
115,000
$132,000
$148,000
$0
23,000
69,000
40,000
$132,000
$0
24,000
74,000
$98,000
$50,000
Example of Purchase Method
Now, we bring in the book values for the accounts of
Beaver Ltd. (acquirer)…
© 2007 by Nelson, a division of Thomson Canada Limited.
73
Example of Purchase Method
Book Values
Beaver
Eagle
Cash & equivalents 18,000
7,000
Other current assets 53,000 29,000
Non-current assets 87,000 96,000
Investment in Eagle 52,000
-Goodwill
--210,000 132,000
Accounts payable
20,000
0
Other current liab.
17,000 23,000
Non-current liab.
72,000 69,000
Non-contr. interest
--Equity
101,000 40,000
210,000 132,000
Calculations
Consol. Figures
+.70(7,000 - 7,000)
25,000
+.70(26,000 - 29,000)
79,900
+.70(115,000 - 96,000)
196,300
eliminate
-17,000
calculated below
318,200
+.70(0)
20,000
+.70(24,000 - 23,000)
40,700
+.70(74,000 - 69,000)
144,500
.30(40,000)
12,000
eliminate Eagle's equity
101,000
318,200
Goodwill = 52,000-.70(7,000+26,000+115,000-24,000-74,000)= 17,000
FV of assets minus FV of liabilities