Busi 3001 accounting for business combinations
It is now March 10, 2018. You, CPA, have just been hired as the new controller for The YoungCanadians (TYC). Your first major task is to assist TYC with its December 31, 2017, financialstatements. TYC is a small public company operating out of Toronto, Ontario.The TYC Network is a fast-growing network of channels featuring general and nicheprogramming. Programming includes news,politics, technology, sports, enter tainment andmore. TYC only delivers content online and does not deliver content on the radio or television.TYC was founded in 2005 by Cenk Iadarola (current CEO) in his living room. Since its humblebeginning, the Company has grown to over 25,000 paying monthly members and 70 full-timeemployees.
TYC has been growing organically in the past, but it has made two equity purchases during theyear: Channel Amazing (CA) and Brain Trust (BT)
Channel Amazing (CA) is a private online media production Company based out of Calgary,Alberta. TYC owned 12% of the Company in 2016. On January 1 2017, TYC increased itsownership in CA by 5% through a $100,000 share purchase. Cenk obtained a voting seat on theboard of CA in January 2017 and participated in the decision of launching a significant newYouTube channel for CA.
CA has seen significant hardships in the current year. The revenue has declined by 20%compared to the same period last year. The net loss for the year doubled from last year to a lossof $500,000. The poor results look as if they will continue in the upcoming year.The investment in CA is currently recorded as a fair value through profit in loss investment. Theinvestment was recorded at $240,000 on TYC’s books as at December 31, 2016. The investment in Channel Amazing is currently recorded at $340,000 as at December 31, 2017.
Brain Trust (BT) is an online media production Company based out of Toronto, Montreal andOttawa. BT challenges preconceptions, exposes amazing new facts and discoveries, exploresdifferent perspectives, and inspires its audience to learn more about the world and the peoplearound them. The BT network currently has a very strong trademark value due to the viewersand website subscribers it has.TYC purchased 100% of BT on January 1, 2017. TYC purchased BT for $2,000,000 of cash and$1,000,000 in potential cash consideration based on meeting BT’s 2017 to 2018 revenue targets.
The contingent consideration is payable on December 31, 2018. TYC also issued 100,000 TYCshares which had a stock price of $10 each on the acquisition date and had a 1 year tradingrestriction. Perindependent valuators, due to these restrictions, a market investor would only pay95% of the share price for these restricted shares.` The Young Canadians (TYC) (60 Minutes)
Within its Toronto office, BT hosts 5 to 10 minute segments on various issues that would be ofinterest to their audience (pop culture, history, socializing, relationships and more). The twoother satellite offices in Montreal and Ottawa are small and operate independently. These officespartner with local high schools within the city to help them create brand awareness videos. TheToronto office encompasses most of the Company’s operations and has had a much better yearthan expected. Both the Montreal and Ottawa office have had a bad year financially. It appearsboth offices will be closed down by the end of 2018.Cenk prepared the following purchase price allocation for the purchase of BT.
Purchase Price Allocation: Brain Trust
Contingent Payment 1,000,000
Shares Issued 1,000,000
Total Consideration 4,000,000
Net Book Value of BT's Net
Assets $ 500 ,000
Allocation to Johnny Pie 1,000,000
Allocation to Goodwill 2,500,000
Per discussion with Cenk, BT is not a capital-intensive business, as they do not own anysignificant capital assets. Hence, the only allocation of Goodwill he made was to the value of theCEO of Brain Trust, Johnny Pie. Cenk mentions that one of the reasons TYC bought BT was dueto the popularity of Johnny Pie on online media networks. BT had patents worth $1,500,000 onJanuary 1, 2017, relating to content it has created which are not recorded in the net assets above.Originally, Cenk believed there was a 50% chance the contingent consideration to BT would bepaid. The Toronto division of BT hasdone very well, and he now believes the chance the payoutwill be made is 75%. Even though the Ottawa and Montreal divisions of BT have done poorly,BT as a whole has grown.
The Goodwill relating to the BT acquisition remains recorded at $2,500,000 as of December 31,
Please provide the accounting adjustments relating to the two acquisitions for the year endedDecember 31, 2017. Your discussions should use the case facts, the appropriate technical