Business Combination

BusinessCombination

InstitutionAffiliation:

Businesscombination

Here,business entities come together with a view to increasing theirmarket field and minimize costs (Burger&amp Robertson, 1998 Hewing, 2013). As such, it is a significantpart of increasing market share and upping competition. In thisregards, the assessment of the financial statements of Rhodes andFergusson and the subsequent acquisition of Rhodes by Fergusson willinstill points of calculating goodwill.

Subsidiary

Thisis business combination method where a larger company, the parentcompany, acquires a majority control stake in a lesser companyusually called the daughter (Hewing,2013).This can be a whole take over or a part take over which is usuallymore than 50% of the subsidiary.

Thereasons for subsidiary take over include:

Improvedand expounded market range

Minimizedoperation cost

Takeadvantage of already established market by the subsidiary to sellgoods produced by the parent company.

Thepurchase will help the business grow in many dimensions, whichinclude venturing into markets previously help as most competitiveand difficult to venture.

Thesynergies most associated with business combinations is reducedheadcount, which in turn reduce workforce salaries and reduction inoperation cost (Hewing,2013).In addition, Jeter&amp Chaney (2011) contend that economiesof scale where a bigger company has an improved bargain power whilemaking its purchases from its supplier is an important synergy inbusiness combination.

Acquisitionof new technology is yet another synergy associated with businesscombination. The parent or the daughter company will benefit withimproved technology from either company to keep it valid andcompetitive in the market. On the other hand, a wider marketvisibility involves a scenario where the parent company is able tomake its presence felt and seen in markets previously occupied by thesubsidiary (Jeter&amp Chaney, 2011).

Example:

Fergussonltd is a company listed under the companies act in the US. It wishesto acquire Rhodes ltd as its subsidiary to reach a wider market. Thefollowing are the financial statements of the two companies as ofSeptember year 2003.

ACCOUNTINGFOR GROUPS

FergussonLtd. Rhodes Ltd.

$.‘000’ $. ‘000’

Cashat bank -11,500

Receivables 62,300 51,600

Dividend: Interim paid 4,500 3,000

Expenses(including depreciation of fixed assets) 184,700 123,600

Freeholdland and buildings (net book value) 25,500 18,900

Investmentin Rhodes Limited 94,260

Motorvehicles (net book value)6,700 4,900

Purchases375,400335,200

Plantand machinery (net book value) 28,900 21,600

Inventory22,100 17,600

Taxation: installment tax paid 9,100 6,380

813,460 594,280

Bankoverdraft (secured on land and buildings) 6,700

Payables 38,200 17,100

Sales586,600480,000

Sharecapital:Authorized, issued and fully paid Ordinary

sharesof $.10 60,000 20,000

RetainedProfits 121,960 77,180

813,460 594,280

Additionalinformation:

(i) Closing inventory was $.24, 200,000 in Fergusson and $.19, 200,000in Rhodes.

(ii) The turnover and expenses in Rhodes accrued evenly over the yearthe rate of gross

profitwas constant throughout the year.

(iii) Fergusson paid its interim dividend on 15th May 2005 Rhodes paidits interim dividend on 31

March2005. Fergusson has not yet accounted for any dividend receivablefrom Rhodes.

(iv)Between 1 May 2005 and 30 September 2005, Fergusson sold goods toRhodes. These goods had cost Fergusson $.30 million. Fergussonearned a gross profit of 37.5% on the selling price of these goods. On 30 September 2005, one sixth of these goods were included in thestock of Rhodes. Included in the debtors figure for Fergusson was$. 7,200,000 from Rhodes:

Fergusson’saccount in Rhodes’s books agreed with this figure.

(v) The self-assessment tax returns of Fergusson and Rhodes show thecorporation tax charge for the year at $.10, 020,000 and $.7,980,000respectively both companies have paid installment tax on thepreceding year basis.

(vi)The directors have proposed that Fergusson should pay a finaldividend of $.6 million and Rhodes $.3 million.

(vii) Goodwillarisingontheacquisitionof Rhodes is consideredtobeimpairedat $.1million

Solution

FergussonLtd and Rhodes Ltd

Incomestatement for year to 30 September 2005

Fergusson Rhodes Group

$.‘000’ $. ‘000’$. ‘000’

Sales586,600 480,000 738,600

Costof sales:

Openinginventory 22,10017,600

Purchases 375,400 335,200

397,500 352,800

Lessclosing inventory(24,200) (19,200)

373,300 333,600

Grossprofit 213,300 146,400 467,300

Expenses (184,700) (123,600) (236,200)

Goodwillimpairment _-___(1000)

Operatingprofit28,600 22,800 34,100

Dividendincome 2,000 – ___ –

Profitbefore tax 30,600 22,800 34,100

Incometax expense (10,020) (7,980)(13,345)

Profitafter tax 20,580 14,820 20,755

LessMI__-_ __-_ __

(1,235)_

Profitattributable to Shareholders of Fergusson20,580 14,82019,520

Dividends:Paid (4,500) (3,000) (4,500)

Dividends:Proposed(6,000) (3,000) (6,000)

130,980 132,04086,000

Retainedprofits: Yr. C/F

HoldingCo Fergusson) 6,080 128,040

SubsidiaryRhodes) 2,940 2,940

9,020 130,980

Workingsfor intergroup sales

Sales= (30m X 0.6) +30000 = 48m

Groupsales = (586,600 + (5/12 X 480,000)) – 48,000 = 738600

Groupcost of sales = 373300 + (5/12 X 333600) – 48,000 + VP = 467300

Where,VP = (1/6 X (48,000 – 30,000) = 3,000

Groupexpenses = 184700 + (5/12 X 123,600) = 236,200

Dividendincome

7months 5 months

Totaldividend payable by Rhodes = 6,000

Totaldividend accountable for by Fergusson= 80% X 6,000 = 4,800

Preacqpost acq

7/12X 4,800 = 5/12 X 4,800

=2,800= 2,000

Dividendreceivable = 2,400

Postacq P&ampL) = (2,000)

Preacq COC)= 400

Minorityinterest:

Profitafter tax in Rhodes 14,820

Lesspre acq (8,645)

Amountin Group P &amp L6,100

MI20%) 1,235

Statementof retained profits:

Retainedprofits: b/f Yr C/F

$.‘000’ $. ‘000’ $. ‘000’

Holdingco: Fergusson)121,960 10,080132,040

UPCS- (3,000)(3,000

Goodwillimpaired- (1,000)(1,000)

121,960 6,080128,040

Subsidiary:Rhodes)77,180 (5,145) (82,325)

Lesspre-acq profits(77,180) (5,145) (82,325)

3,675

3,675

Groupshare 80%) – 2,9402,940

Groupexpenses = 184700 + (5/12 X 123,600) = 236,200

Dividendincome

7months 5 months

Totaldividend payable by Rhodes= 6,000

Totaldividend accountable for by Fergusson = 80% X 6,000 = 4,800

Preacqpost acq

7/12X 4,800 = 5/12 X 4,800

=2,800= 2,000

Dividendreceivable = 2,400

Postacq P&ampL) = (2,000)

Preacq P&ampL)

Minorityinterest:

Profitafter tax in Rhodes 14,820

Lesspre acq (8,645)

Amountin Group P &amp L6,175

MI20%) 1,235

Statementof retained profits:

Retainedprofits: b/f Yr c/f

$.‘000’ $. ‘000’ $. ‘000’

Holdingco: Fergusson) 121,960 10,080132,040

UPCS-(3,000)(3,000)

Goodwillimpaired – (1,000)(1,000)

121,960 6,080128,040

Subsidiary:Rhodes) 77,180 (5,145) (82,325)

Lesspre-acq profits (77,180) (5,145) (82,325)

3,675

3675

Groupshare 80%) – 2,9402,940

References

Burger,Y., &amp Robertson, D. (1998). Formalsupport for an informal business modelling method.Edinburgh: University of Edinburgh, Dept. of Artificial Intelligence.

Hewing,M. (2013). BusinessProcess Blueprinting a Method for Customer-Oriented Business ProcessModeling..Dordrecht: Springer.

Jeter,D. C., &amp Chaney, P. K. (2011). Advancedaccounting(4. ed.). Singapore: John Wiley.