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Example – Pitt Co. Data

Example – Pitt Co. Data

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Cash
Net receivables
Inventory
Land
Buildings, net
Equipment, net
Patents
Total assets
Accounts payable
Notes payable
Other liabilities
Total liabilities
Net assets

Book Val.
$ 50
150
200
50
300
250
0
$1,000
$ 60
150
40
$ 250
$ 750

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Fair Val.
$ 50
140
250
100
500
350
50
$1,440
$ 60
135
45
$ 240
$1,200
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Acquisition with Goodwill
Pitt Co. pays $400,000 cash and issues 50,000
shares of Pitt Co. $10 par common stock with a
market value of $20 per share for the net assets
of Seed Co.
Total consideration at fair value (in thousands):
$400 + (50 shares x $20)
$1,400
Fair value of net assets acquired: $1,200
Goodwill
$ 200

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Entries with Goodwill
The entry to record the acquisition of the net
assets:
Investment in Seed Co.
1,400
Cash
400
Common stock, $10 par
500
Additional paid-in-capital
500
The entry to record Seed’s assets directly on Pitt’s
books:
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Cash
Net receivables
Inventories
Land
Buildings
Equipment
Patents
Goodwill
Accounts payable
Notes payable
Other liabilities
Investment in Seed Co.
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50
140
250
100
500
350
50
200
60
135
45
1,400
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Acquisition with Bargain Purchase
Pitt Co. issues 40,000 shares of its $10 par
common stock with a market value of $20 per
share, and it also gives a 10%, five-year note
payable for $200,000 for the net assets of Seed
Co.
Fair value of net assets acquired (in thousands):
$1,200
Total consideration at fair value:
(40 shares x $20) + $200
$1,000
Gain from bargain purchase
$ 200
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Entries with Bargain Purchase
The entry to record the acquisition of the net
assets:
Investment in Seed Co.
1,000
10% Note payable
200
Common stock, $10 par
400
Additional paid-in-capital
400
The entry to record Seed’s assets directly on Pitt’s
books:
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Cash
Net receivables
Inventories
Land
Buildings
Equipment
Patents
Accounts payable
Notes payable
Other liabilities
Investment in Seed Co.
Gain from bargain purchase
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50
140
250
100
500
350
50
60
135
45
1,000
200
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Goodwill Controversies
• Capitalized goodwill is the purchase price not
assigned to identifiable assets and liabilities.
– Errors in valuing assets and liabilities affect
the amount of goodwill recorded.
• Historically goodwill in most industrialized
countries was capitalized and amortized.
• Current IASB standards, like U.S. GAAP
– Capitalize goodwill,
– Do not amortize it, and
– Test it for impairment.
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Impairments
• Firms must test annually for the impairment of
goodwill at the business unit reporting level.
– If the unit’s book value exceeds its fair value,
additional tests must be performed to
determine the impairment of goodwill and/or
other assets.
• More frequent testing for goodwill impairment
may be needed (e.g., loss of key personnel,
unanticipated competition, goodwill impairment
of subsidiary).
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Business Combination Disclosures
• FASB Statement No. 141R and 142 prescribe
disclosures for business combinations and
intangible assets. This includes, but is not limited
to:
– Reason for combination,
– Allocation of purchase price among assets and
liabilities,
– Pro-forma results of operations, and
– Goodwill or gain from bargain purchase.
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Sarbanes-Oxley Act of 2002
• Establishes the PCAOB
• Requires
– Greater independence of auditors and clients
– Greater independence of corporate boards
– Independent audits of internal controls
– Increased disclosures of off-balance sheet
arrangements and obligations
– More types of disclosures on Form 8-K
• SEC enforces SOX and rules of the PCAOB
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