Business Combinations, CGU Analysis, and Lease Accounting
Posted on Nov 16, 2024 in Law & Jurisprudence
Exercise 1
1) Business Purchase Accounting (Cash Payments)
Goodwill acquired in a business combination, as per Rule 19 of GAP assessment, is calculated as:
- Fair value of consideration paid (amount paid)
- Less: Fair value of identifiable assets acquired
- Plus: Fair value of liabilities assumed
Initial Goodwill Value
| Amount Paid | 110,000.00 |
| Identifiable Assets | 100,000.00 |
| Goodwill | 10,000.00 |
| Code | Account | Debit | Credit |
| 21 | Tangible Assets | 100,000.00 | |
| 204 | Goodwill | 10,000.00 | |
| 572 | Cash at Bank | | 110,000.00 |
2) CGU Year-End 2009 Operations
Depreciation Calculation (2009)
| Initial Value of Tangible Fixed Assets | 100,000.00 |
| – Accumulated Depreciation | 0.00 |
| – Impairment | 0.00 |
| Depreciation Base | 100,000.00 |
| Remaining Useful Life: 5 years | |
| 2009 Depreciation | 20,000.00 |
Asset Amortization
| Code | Account | Debit | Credit |
| 681 | Depreciation Expense | 20,000.00 | |
| 281 | Accumulated Depreciation | | 20,000.00 |
*Detailed fixed asset composition would require individual depreciation calculations.
Goodwill is not amortized but subject to impairment testing.
Impairment Evidence
| Recoverable Value | 65,000.00 |
| Fair Value – Sale Costs | 65,000.00 |
| Value in Use | 60,000.00 |
| Book Value | 110,000.00 |
| 2009 Impairment | 45,000.00 |
Impairment exceeds goodwill; goodwill (10,000) is canceled first, the remainder reduces asset value.
Goodwill Impairment
| Code | Account | Debit | Credit |
| 690 | Impairment Loss – Intangibles | 10,000.00 | |
| 204 | Goodwill | | 10,000.00 |
Other Asset Impairment
| Code | Account | Debit | Credit |
| 691 | Impairment Loss – Fixed Assets | 35,000.00 | |
| 291 | Impairment – Fixed Assets | | 35,000.00 |
*Detailed fixed asset composition would require proportional impairment calculations.
3) CGU Year-End 2010 Operations
Depreciation Calculation (2010)
| Initial Value of Tangible Fixed Assets | 100,000.00 |
| – Accumulated Depreciation | -20,000.00 |
| – Impairment | -35,000.00 |
| Depreciation Base | 45,000.00 |
| Remaining Useful Life: 4 years | |
| 2010 Depreciation | 11,250.00 |
Asset Amortization
| Code | Account | Debit | Credit |
| 681 | Depreciation Expense | 11,250.00 | |
| 281 | Accumulated Depreciation | | 11,250.00 |
Impairment Evidence
| Recoverable Value | 55,000.00 |
| Fair Value – Sales Costs | 60,000.00 |
| Value in Use | 55,000.00 |
| Book Value | 45,000.00 |
| 2010 Impairment | 0.00 |
Goodwill impairment is not reversible, tangible asset impairment is.
Year 2
a) Cost of Sales Calculation
| Digital Advertising | 2,000.00 |
| Taxation | 3,500.00 |
| Gain | 5,000.00 |
| Tasks Conditioning | 10,000.00 |
| Total Cost of Sales | 20,500.00 |
b) Excluded Items
Cost of sales includes direct selling costs. Profit taxes are excluded (per PGC).
Non-Cash Contribution Valuation
a) Valuation
Rule 17a (equity-based payments) values non-cash fixed asset contributions at fair value (if reliably estimated). The provided technical report (accepted by the registrar) justifies the 125,000 valuation.
b) Current Regulations
The revised Companies Act (Real Legislative Decree 1/2010, BOE 03-07-2010) repealed:
- Commercial Code of 1885, Book II, Title I, Section 4 (Articles 151-157)
- Royal Decree 1564/1989
- Law 2/1995
- Law 24/1988, Title X (Articles 111-117), except Art. 114(2,4), 116, 116 bis
The Capital Partnership Act (Art. 67) mandates an independent expert report for non-cash contributions, filed with the registrar. The stated contribution value cannot exceed this expert valuation.
Exercise 3
Lease Classification and Accounting
a) Lease Type and Justification
GAP’s Rule 8 classifies a lease as a finance lease if the contract effectively transfers all risks and rewards of ownership. A bargain purchase option indicates a finance lease.
Analysis
| Value at Contract End (40,000 x (1 – 4/5)) | 8,000.00 |
| Purchase Option Value | 500.00 |
This contract qualifies as a finance lease.
b) Effective Interest Rate and Amortization (01/01/2008)
Cash Flow Diagram:
01/01/08: +40,000
31/12/08-31/12/11: -11,000.00
31/12/11: -500.00
Effective Interest Rate (I): 4.37%
Lease Amortization Table
| Date | Debt | Interest Rate | Interest Expense | Lease Payment + Option | Debt Amortization + Option |
| 01/01/2008 | 40,000.00 | | | | |
| 31/12/2008 | 40,000.00 | 4.37% | 1,749.90 | 11,000.00 | 9,250.10 |
| 31/12/2009 | 30,749.90 | 4.37% | 1,345.23 | 11,000.00 | 9,654.77 |
| 31/12/2010 | 21,095.13 | 4.37% | 922.86 | 11,000.00 | 10,077.14 |
| 31/12/2011 | 11,017.99 | 4.37% | 482.01 | 11,500.00 | 11,017.99 |
Lease Accounting (01/01/2008)
| Code | Account | Debit | Credit |
| 218 | Transport Equipment | 40,000.00 | |
| 174 | Long-Term Lease Liability | | 30,749.90 |
| 524 | Short-Term Lease Liability | | 9,250.10 |
Lease Operations (2010)
Lease Payment
| Code | Account | Debit | Credit |
| 524 | Short-Term Lease Liability | 10,077.14 | |
| 662 | Interest Expense | 922.86 | |
| 472 | VAT Payable (11,000 x 0.16) | 1,760.00 | |
| 572 | Cash at Bank | | 12,760.00 |
Depreciation
| Code | Account | Debit | Credit |
| 681 | Depreciation Expense (40,000 / 5) | 8,000.00 | |
| 281 | Accumulated Depreciation | | 8,000.00 |
Debt Reclassification
| Code | Account | Debit | Credit |
| 524 | Short-Term Lease Liability | 11,017.99 | |
| 174 | Long-Term Lease Liability | | 11,017.99 |
Year 4
a) Operations (2009)
Loan Acquisition (01/01/2009)
| Code | Account | Debit | Credit |
| 572 | Cash at Bank | 250,000.00 | |
| 170 | Long-Term Bank Loan | | 250,000.00 |
Down Payment (01/03/2009)
| Code | Account | Debit | Credit |
| 239 | Advances to Fixed Assets (250,000 x 0.25) | 62,500.00 | |
| 572 | Cash at Bank | | 62,500.00 |
Construction Works (September 2009)
| Code | Account | Debit | Credit |
| 233 | Machinery Assembly | 30,000.00 | |
| 572 | Cash at Bank | | 30,000.00 |
Accrued Interest (31/12/2009)
| Code | Account | Debit | Credit |
| 662 | Interest Expense (250,000 x 0.05) | 12,500.00 | |
| 170 | Long-Term Bank Loan | | 12,500.00 |
Interest Capitalization (31/12/2009)
Capitalize interest accrued before operation start date (greater than one year).
| Code | Account | Debit | Credit |
| 233 | Machinery Assembly | 12,500.00 | |
| 733 | Interest Capitalized to Assets | | 12,500.00 |
No depreciation yet (machine not operational).
b) Operations (2010)
Accrued Interest (30/04/2010)
| Code | Account | Debit | Credit |
| 662 | Interest Expense (250,000 x 0.05 x 4/12) | 4,166.67 | |
| 170 | Long-Term Bank Loan | | 4,166.67 |
Interest Capitalization (30/04/2010)
| Code | Account | Debit | Credit |
| 233 | Machinery Assembly | 4,166.67 | |
| 733 | Interest Capitalized to Assets | | 4,166.67 |
Machine Delivery and Payment (30/04/2010)
| Code | Account | Debit | Credit |
| 213 | Machinery | 363,333.34 | |
| 239 | Advances to Fixed Assets | 62,500.00 | |
| 233 | Machinery Assembly (30,000 + 12,500 + 4,166.67 + 12,500.00 + 4,166.67) | 53,333.34 | |
| 572 | Cash at Bank (250,000 x 0.75) | | 187,500.00 |
| 170 | Long-Term Bank Loan | | 187,500.00 |
Accrued Interest (31/12/2010)
| Code | Account | Debit | Credit |
| 662 | Interest Expense (62,500 x 0.05 x 8/12) | 2083.33 | |
| 170 | Long-Term Bank Loan | | 2083.33 |
Depreciation (31/12/2010)
| Code | Account | Debit | Credit |
| 681 | Depreciation Expense (363,333.34 x 0.1 x 8/12) | 24,222.22 | |
| 281 | Accumulated Depreciation | | 24,222.22 |
