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Chase
Advanced Accounting-219
Consider the following facts: The Issuer and Combiner Corporations have agreed to merge in a transaction which will qualify as a
pooling of interests. Issuer Corporation will issue the required number of previously unissued shares of $5 par common stock in
exchange for all of the net assets of the Combiner Corporation. The number of shares issued will be based on the assumed
market value of $48 per share of Issuer common stock and on the fair market value of the Combiner Corporation.
Immediately prior to the pooling, the Combiner Corporation prepared the following summarized balance sheet:
Combiner Corporation
Balance Sheet
December 31, 19x1
Current assets........................
$ 450,000
Current liabilities................. $
100,000
Property, plant and equipment ........ 2,000,000
Bonds payable.......................
800,000
Accumulated depreciation..............
(500,000)
Common stock, $10 par.......... 250,000
Retained earnings................... 950,000
Goodwill..............................
150,000
Total liabilities............... $
2,100,000
Total assets.....................
$2,100,000
$1,200,000
Current assets and liabilities are recorded at amounts approximating their market values. The following appraisals have been made:
Property, plant, and equipment......................... $
1,550,000
Note that these amounts would be arrived at by negotiation
Goodwill...............................................
200,000
and/or appraisal.
Bonds payable..........................................
780,000
In consummating the transaction, the Issuer Corporation spent $5,000 for direct acquisition costs and $15,000 for
the shares of stock used to acquire the Combiner Corporation.
REQUIRED:
1. Determine the number of shares of stock the Issuer Corporation will issue.
2. Determine the exchange ratio
3. Record the pooling of interests on the books of the Issuer Corporation.
4. What entry would Combiner Corporation make to record the receipt of the shares and their distribution to
shareholders in order to liquidate the corporation?
Dr. M. D. Chase
Advanced Accounting-219
EXAMPLE 1--Solution
1. Determine the number of shares of stock the Issuer Corporation will issue.
--Market value of net assets acquired:
FMV
Current assets.............................. $ 450,000
Property, plant, and equipment.......
1,550,000
Goodwill*.....................................
200,000
Current liabilities..........................
(100,000)
Bonds payable................................
(780,000)
Net market value........................
$ 1,320,000
NOTE: MARKET VALUES ARE USED TO COMPUTE THE NUMBER OF SHARES TO EXCHANGE, BUT NOT TO RECORD ASSET
VALUES IN A POOLING
2. Determine the exchange ratio.
--shares received/shares issued = 27,500 (see computation above);
--exchange ratio = shares received/shares issued = ($250,000/$10 par)/ 27,500 shares;
-- 1 share received to 1.1 share issued;
-- exchange ratio = 1:1.1
The process of Analyzing the Investment in a pooling is completely different from the process of analyzing a purchase investment. In a pooling,
because no purchase is taking place, the analysis consist of comparing the amount of par issued to the value of common stock (C/S) and paid in
capital in excess of par on the common stock (PIC-C/S) received. The total value received will be referred to as PIC (i.e. the total paid in capital
received; the sum of C/S and PIC-C/S). This procedure is outlined below.
Expense..........................................................................
20,000
Cash........................................................................
To record payment of $5,000 direct acquisition costs and $15,000 for
registering and issuing the stock issued to pool with Combiner Corporation
20,000
Dr. M. D. Chase
Advanced Accounting-219
450,000
2,000,000
150,000
1,200,000
EXAMPLE 2:
Issues:
- Recording a pooling when the issuing company gives par worth less than total PIC received.
- Recording a pooling when the issuing company gives par worth more than total PIC received.
The Bergman Company will be the issuing company in a pooling of interests with the Young Company. The two firms had the following
summarized balance sheets just prior to the pooling:
ASSETS:
Current assets............................
Property, plant, and equipment....
Accumulated depreciation............
Other assets..............................
Total assets........................
LIABILITIES:
Accounts Payable.......................... $
Accrued liabilities.......................
Common stock ...............($20 par)
PIC.......................................
Retained earnings.........................
Total liabilities...................
$
.$
Bergman
50,000
750,000
(250,000)
30,000
580,000
Young
40,000
312,500
(62,500)
10,000
300,000
40,000
$
30,000
10,000
-0200,000
($10 par) 100,000
50,000
10,000
160,000
280,000
$
300,000
580,000
REQUIRED: RECORD THE POOLING OF INTEREST UNDER EACH OF THE FOLLOWING INDEPENDENT SITUATIONS:
1. The pooling agreement requires Bergman to issue 3,000 shares of its $20 par stock for the net assets of the Young Company.
2. The pooling agreement requires Bergman to issue 7,500 shares of its $20 par stock for the net assets of the Young Company.
3.The pooling agreement requires Bergman to issue 12,500 shares of its $20 par stock for the net assets of Young Company. The
Bergman Company will also pay $20,000 for stock registration and issuance costs.
Dr. M. D. Chase
Advanced Accounting-219
EXAMPLE 2--Solution
REQUIREMENT 1: Record the pooling if the pooling agreement requires Bergman to issue 3,000 shares of its $20 par stock for the net
assets of Young Company.
--Step 1: Analyze the pooling to determine the makeup of PIC received.
Par issued ($20 x 3,000)..............................................................
$
60,000
Total PIC received: Common stock.............................................
$
100,000
PIC..............................................................
10,000 $
110,000
Par issued < PIC received; excess of PIC received over par issued to issuer PIC
$
50,000
RULE: Par issued is less than total PIC received (PIC here refers to C/S + PIC in excess of par); therefor:
1. allocate excess of PIC received over par issued to Issuer PIC
2. carry over Combiner RE intact and record at book values
Per Analysis
NOTE:
In those cases where par issued is less than total PIC received (total PIC is PIC on stock and PIC in excess of par), it is helpful to
think of this as a "good deal" in that the par issued is less than the total PIC (CS + PIC in excess of par) received. In so far as it is
not GAAP to recognize gains or losses on transactions involving ones own stock, normal stock transaction rules apply. That is to
say, any credit is to "I" (Issuer) PIC and debits would first reduce "I" PIC and then reduce retained earnings of the Combiner.
NOTE:
--Any adjustment to PIC will always be an adjustment to Issuer ("I") PIC; Combiner ("C") PIC will never be reduced as part of the
combination process.
--After all available "I" PIC has been reduced, further adjustments are charged against "C" retained earnings; no charges will be
made to reduce "I" retained earnings unless all "C" retained earnings have been reduced to zero.
REQUIREMENT 2: Record the pooling if the pooling agreement requires Bergman to issue 7,500 shares of its $20 par stock for the net
assets of Young Company.
--Step 1: Analyze the pooling to determine the makeup of PIC received.
Par issued ($20 x 7,500)..............................................................
$
150,000
Total PIC received: Common stock.............................................
$
100,000
110,000
PIC..............................................................
10,000 $
Par issued < PIC received; excess of PIC received over par issued to issuer PIC
$
40,000
RULE: Par issued is more than total PIC received (PIC here refers to C/S + PIC in excess of par); therefor:
1. Reduce issuer PIC to extent available (in this case there is $50,000 available and only $40,000 is needed)
2. Carry over Combiner RE intact (Because Issue PIC was sufficient to absorb the debit) and record at book values
Dr. M. D. Chase
Advanced Accounting-219
Per analysis
NOTE: This is a "Bad Deal" in that the par issued is greater than the total PIC received (again, PIC here refers to C/S + PIC in excess of par).
In this case ("BAD DEAL") Issue PIC must be reduced by the excess of par issued over total PIC received. If Issuer PIC is not sufficient to cover
the difference, Combiner RE is reduced. This is an issued addressed biannually on the Uniform CPA examination. The CPA examiners want to
insure that candidates understand these procedures.
REQUIREMENT 3: Record the pooling if the pooling agreement requires Bergman to issue 12,500 shares of its $20 par stock for the net
assets of Young Company and Bergman must also pay $20,000 for stock registration and issuance costs.
$160,000
50,000
$ 90,000
$ 70,000
NOTE: Almost all CPA Exams make an issue of being able to compute the pooled retained earnings of the combined firm. For this
reason it is important to be able to quickly determine whether combiner retained earnings comes over to the combined firm
intact or must be reduced due to the excess of Issuer par over total Combiner PIC received. If you understand this approach, you
can look forward to doing well on the CPA examinations pooling questions.
Dr. M. D. Chase
Advanced Accounting-219
Special considerations exist when a pooling of interest is accomplished via the use of Issuer Treasury Stock.
RULE: a: Retire the treasury stock
Cost Method
15,000
10,000
5,000
Par Method
15,000
10,000
5,000
1,200
(100 x $10)
1,000
500
300
1,200
1,200
1,600
(100 x $10)
1,000
500
100
1,600
1,600
2,000
1,000
2,000
200
2,800
TS carried at cost
Relationship of CS and PIC is not maintained
Relationship of CS and PIC must be restored
upon retirement of TS
(TS @ par)
2,000
TS is carried at par
Relationship of CS and PIC is always correct
Retirement is at par value
Dr. M. D. Chase
Advanced Accounting-219
To illustrate the use of Treasury stock in a pooling, assume the following facts:
Issuer has agreed to exchange 10,000 shares of its currently held treasury stock for the net assets of Combiner Corp. Immediately prior to the
exchange the two firms had the following summarized balance sheets:
ASSETS
Current Assets...........................
Property, plant and equipment (net)......
Total Assets........................
Liabilities and Equity
Current liabilities......................
Common Stock ($10 and $5 par respectively)
Paid-in Capital in excess of par.........
Retained earnings........................
Treasury stock at cost...................
Total liabilities and Equity........
$
$
ISSUER
440,000
1,250,000
1,690,000
200,000
1,000,000
100,000
480,000
(90,000)
1,690,000
COMBINER
200,000
800,000
$
1,000,000
90,000
150,000
120,000
640,000
-01,000,000
REQUIRED:
1. State the procedure to be followed when issuer uses treasury stock to accomplish a pooling.
2. Analyze the investment
3. Present the necessary journal entries to record the pooling
EXAMPLE 3 -- SOLUTION
REQUIREMENT 1. a:
b: