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Business Combination Part 3

The document discusses methods for estimating goodwill in a business combination, including capitalization of average excess earnings and multiples of average excess earnings. It also covers accounting for a reverse acquisition, where one company legally acquires another but the substance is the opposite. There are assignment problems at the end involving calculations related to these topics.

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34 views4 pages

Business Combination Part 3

The document discusses methods for estimating goodwill in a business combination, including capitalization of average excess earnings and multiples of average excess earnings. It also covers accounting for a reverse acquisition, where one company legally acquires another but the substance is the opposite. There are assignment problems at the end involving calculations related to these topics.

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CH3 - Business Combinations (Part 1) : Special Accounting Topics

Friday, 3 May 2024 9:04 am

PROB. 1 (pg 121)


1. Methods of estimating goodwill
(1) Capitalization of Ave. Excess Earnings
Ave. Annual earnings 1,000,000
Normal earnings (8M*12%) 960,000
Excess earnings 40,000
Divided by: Capitalization rate 25%
Goodwill 160,000

(2) Capitalization of Ave. Earnings


Ave. Annual earnings 1,000,000
Divided by: Capitalization rate 12%
Estimated purchase price 8,333,333
Less: FV of net assets of Entity B 8,000,000
Goodwill 333,333

(3) Multiples of Ave. Excess Earnings


Ave. Annual earnings 1,000,000
Normal earnings (8M*12%) 960,000
Excess earnings 40,000
Multiply by: Probable duration 5
Goodwill 200,000

(4) Present Value of Ave. Excess Earnings


Ave. Annual earnings 1,000,000
Normal earnings (8M*12%) 960,000
Excess earnings 40,000
Multiply by: PVOA @9%, n=5 *3.8896512633
Goodwill 200,000
• 1.09 // ===== GT
• 1.09 // ===== -1 /.09
PROB. 1 (pg 122)
2. Reverse acquisition
Legal form: Entity A issues shares to Entity B
Entity A's currently issued shares (25%) 2,000
Shares to be issued to Entity B (2*3,000) (75%) 6,000
Total shares after the business combination 8,000
Substance: Reverse - Entity B issues shares to Entity A

Entity B's current issued shares (75%) 3,000


Shares issued to Entity A (3k / 75%)*25% (25%) 1,000
Total shares after the business combination 4,000

CT (1k sh. * 300) 300,000


NCI 0
PHEI 0
TOTAL 300,000
Less: FVNIA (260,000)
Goodwill 40,000
ASSIGNMENT:
Problem 3 (pg 124)
5 questions

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