Financial Statements question....?

Question

A company aquires a competitior for $100 million. It amortizes the transation over ten years ($10 million/year). What transactions occur on the income statement, balance sheet, and cash flow statements in years 1 and 2?

What would occur to the Cash Flow Statement? Would $10 million go under Cap Ex?

Answer 1

Why are you amortizing a long-term investment? Why is the cost of acquisition being amortised? This is not GAAP compliant. This sounds like a Business Combination, the subject of IFRS 3. If the acquiree was a dud and has lost its value, you impair it in accordance with IAS 36 Impairment of Assets, you don't amortise it.

The acquirer measures the cost of a business combination at the sum of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree; plus any costs directly attributable to the combination. [IFRS 3.24]

Answer 2

Amortization is recorded in the financial statements of an entity as a reduction in the carrying value of the intangible asset in the balance sheet and as an expense in the income statement. The entries will be the same for both years but the balances of the asset for year 2 will be less $10million due to year one's reduction. The income statement will show the same $10million dollar expense both years.

Answer 3

When the competitor xxx, is acquired:

dr the xxx 100,000,000.
cr cash 100,000,000.

End of first year:

dr amortization expense xxx 10,000,000.
cr accumulated amortization xxx 10,000,000.

The contra account offsets xxx, but does not change the asset account. Accumulated amortization would now have a
credit balance of 10,000,000.

End of second year:

Same entry as year one.

Now, accumulated amortization has a credit balance of 20,000,000.The difference showing (100,000,000. - 20,000,000.) = 80,000,000.