Skip to document
Welcome to StudocuSign in to access the best study resources
Guest user
0followers
HomeMy LibraryAsk AI
  • You don't have any recent items yet.
My Library
  • You don't have any courses yet.
  • You don't have any books yet.
  • You don't have any Studylists yet.

Advanced Accounting - Chapter 1

Advanced Accounting - 11th Edition
Academic year: 2017/2018
Uploaded by:
MA
Maria Almendarez
Central America Health Sciences University Belize Medical College
0followers
1Uploads
11upvotes

Comments

Please sign in or register to post comments.

Students also viewed

Related documents

Related Studylists

ABID FATAH

Preview text

Chapter 1 1

Chapter 1

BUSINESS COMBINATIONS

Answers to Questions

1 A business combination is a union of business entities in which two or more previously separate and independent companies are brought under the control of a single management team. FASB Statement No. 141 describes three situations that establish the control necessary for a business combination, namely, when one or more corporations become subsidiaries, when one company transfers its net assets to another, and when each combining company transfers its net assets to a newly formed corporation.

2 The dissolution of all but one of the separate legal entities is not necessary for a business combination. An example of one form of business combination in which the separate legal entities are not dissolved is when one corporation becomes a subsidiary of another. In the case of a parent-subsidiary relationship, each combining company continues to exist as a separate legal entity even though both companies are under the control of a single management team.

3 A business combination occurs when two or more previously separate and independent companies are brought under the control of a single management team. Merger and consolidation in a generic sense are frequently used as synonyms for the term business combination. In a technical sense, however, a merger is a type of business combination in which all but one of the combining entities are dissolved and a consolidation is a type of business combination in which a new corporation is formed to take over the assets of two or more previously separate companies and all of the combining companies are dissolved.

4 Goodwill arises in a business combination accounted for under the purchase method when the cost of the investment (price paid plus direct costs) exceeds the fair value of identifiable net assets acquired. Under FASB Statement No. 142, goodwill is no longer amortized for financial reporting purposes and will have no effect on net income, unless the goodwill is deemed to be impaired. If goodwill is impaired, a loss will be reocnized.

5 Negative goodwill is the opposite of goodwill. It results from a purchase business combination in which the fair value of identifiable net assets acquired exceeds the investment cost. Any negative goodwill must be applied to a proportionate reduction of noncurrent assets other than marketable securities. If negative goodwill is greater than the fair value of all noncurrent assets acquired other than marketable securities, the excess is written off as an extraordinary loss on the income statement under FASB Statement No. 141.

2 Business Combinations

SOLUTIONS TO EXERCISES

Solution E1-

1 a 2 b 3 a 4 c 5 d

Solution E1-2 [AICPA adapted]

1 d Plant and equipment should be recorded at $45,000, the $55,000 fair value less the $10,000 excess fair value of net assets acquired over investment cost.

2 c Investment cost $800,

Less: Fair value of net assets Cash $ 80, Inventory 190, Property and equipment — net 560, Liabilities (180,000) 650, Goodwill $150,

Solution E1-

Stockholders’ equity — Pillow Corporation on January 3

Capital stock, $10 par, 300,000 shares outstanding $3,000,

Additional paid-in capital [$200,000 + $1,500,000 – $5,000] 1,695,

Retained earnings 600, Total stockholders’ equity $5,295,

Entry to record combination:

Investment in Sleep-bank 3,000, Capital stock, $10 par 1,500, Additional paid-in capital 1,500,

Investment in Sleep-bank 10, Additional paid-in capital 5, Cash 15,

Check: Net assets per books $3,800, Goodwill 1,510, Less: Issuance of stock (15,000 ) $5,295,

4 Business Combinations

Solution E1-

Journal entries on IceAge’s books to record the purchase

Investment in Jester 2,550, Common stock, $10 par 1,200, Additional paid-in capital 1,350, To record issuance of 120,000 shares of $10 par common stock with a fair value of $2,550,000 for the common stock of Jester in a purchase business combination.

Investment in Jester 25, Additional paid-in capital 15, Expenses of combination 20, Other assets 60, To record costs of registering and issuing securities as paid-in capital, direct cost of combination as investment, and indirect costs of combination as expenses.

Current assets 1,100, Plant assets 1,775, Liabilities 300, Investment in Jester 2,575, To record allocation of the $2,575,000 cost of Jester Company to identifiable assets and liabilities according to their fair values, computed as follows:

Cost $2,575, Fair value acquired 3,000, Negative goodwill $ 425,

Plant assets at fair value $2,200,

Less: Negative goodwill 425, Cost allocated to plant assets $1,775,

Chapter 1 5

Solution E1-

Journal entries on the books of Danders Corporation to record merger with Harrison Corporation:

Investment in Harrison 530, Common stock, $10 par 180, Additional paid-in capital 150, Cash 200, To record issuance of 18,000 common shares and payment of cash in the acquisition of Harrison Corporation in a merger.

Investment in Harrison 70, Additional paid-in capital 30, Cash 100, To record costs of registering and issuing securities and additional direct costs of combination.

Cash 40, Inventories 100, Other current assets 20, Plant assets — net 280, Goodwill 230, Current liabilities 30, Other liabilities 40, Investment in Harrison 600, To record allocation of cost to assets received and liabilities assumed on the basis of their fair values and to goodwill computed as follows:

Cost of investment $600, Fair value of assets acquired 370, Goodwill $230,

Chapter 1 7

Solution P1-

Preliminary computations Cost of acquiring Seabird ($825,000 + $100,000 direct costs) $925, Fair value of assets acquired and liabilities assumed 670, Goodwill from acquisition of Seabird $255,

Pelican Corporation Balance Sheet at January 2, 2006

Assets

Current assets

Cash [$150,000 + $30,000 - $140,000 expenses paid] $ 40,

Accounts receivable — net [$230,000 + $40,000 fair value] 270,

Inventories [$520,000 + $120,000 fair value] 640,

Plant assets

Land [$400,000 + $150,000 fair value] 550,

Buildings — net [$1,000,000 + $300,000 fair value] 1,300,

Equipment — net [$500,000 + $250,000 fair value] 750,

Goodwill 255, Total assets $3,805,

Liabilities and Stockholders’ Equity

Liabilities

Accounts payable [$300,000 + $40,000] $ 340,

Note payable [$600,000 + $180,000 fair value] 780,

Stockholders’ equity

Capital stock, $10 par [$800,000 + (33,000 shares ́ $10)] 1,130,

Other paid-in capital [$600,000 - $40,000 + ($825,000 - $330,000)] 1,055,

Retained earnings 500, Total liabilities and stockholders’ equity $3,805,

8 Business Combinations

Solution P1-

Persis issues 25,000 shares of stock for Sineco’s outstanding shares:

1a Investment in Sineco 750, Capital stock, $10 par 250, Other paid-in capital 500, To record issuance of 25,000, $10 par shares with a market price of $30 per share in a purchase business combination with Sineco.

Investment in Sineco 30, Other paid-in capital 20, Cash 50, To record costs of combination in a purchase business combination with Sineco.

Cash 10, Inventories 60, Other current assets 100, Land 100, Plant and equipment — net 350, Goodwill 210, Liabilities 50, Investment in Sineco 780,

To record allocation of investment cost to identifiable assets and liabilities according to their fair values and the remainder to goodwill. Goodwill is computed: $780,000 cost - $570,000 fair value of net assets acquired.

1b Persis Corporation Balance Sheet January 2, 2006 (after purchase business combination)

Assets Cash [$70,000 + $10,000] $ 80, Inventories [$50,000 + $60,000] 110, Other current assets [$100,000 + $100,000] 200, Land [$80,000 + $100,000] 180, Plant and equipment — net [$650,000 + $350,000] 1,000, Goodwill 210, Total assets $1,780,

Liabilities and Stockholders’ Equity Liabilities [$200,000 + $50,000] $ 250, Capital stock, $10 par [$500,000 + $250,000] 750, Other paid-in capital [$200,000 + $500,000 - $20,000] 680, Retained earnings 100, Total liabilities and stockholders’ equity $1,780,

10 Business Combinations

Solution P1-3 (continued)

2b Persis Corporation Balance Sheet January 2, 2006 (after purchase business combination)

Assets Cash [$70,000 + $10,000] $ 80, Inventories [$50,000 + $60,000] 110, Other current assets [$100,000 + $100,000] 200, Land [$80,000 + $80,000] 160, Plant and equipment — net [$650,000 + $280,000] 930, Total assets $1,480,

Liabilities and stockholders’ equity Liabilities [$200,000 + $50,000] $ 250, Capital stock, $10 par [$500,000 + $150,000] 650, Other paid-in capital [$200,000 + $300,000 - $20,000] 480, Retained earnings 100, Total liabilities and stockholders’ equity $1,480,

Chapter 1 11

Solution P1-

1 Schedule to allocate investment cost to assets and liabilities

Investment cost, January 1, 2006 $300, Fair value acquired from Sen ($360,000 ́ 100%) 360, Excess fair value acquired over cost $ 60,

Allocation:

Initial Allocation Reallocation

Final Allocation Cash $ 10,000 --- $ 10, Receivables — net 20,000 --- 20, Inventories 30,000 --- 30, Land 100,000 $ (15,000) 85, Buildings — net 150,000 (22,500) 127, Equipment — net 150,000 (22,500) 127, Accounts payable (30,000) --- (30,000) Other liabilities (70,000) --- (70,000) Excess fair value (60,000 ) 60,000 --- Totals $ 300,000 0 $ 300,

2 Phule Corporation Balance Sheet at January 1, 2006 (after combination) Assets Liabilities

Cash $ 25,000 Accounts payable $ 120, Receivables — net 60,000 Note payable (5 years) 200, Inventories 150,000 Other liabilities 170, Land 130,000 Liabilities 490, Buildings — net 327, Equipment — net 307,500 Stockholders’ Equity

Capital stock, $10 par 300, Other paid-in capital 100, Retained earnings 110, Stockholders’ equity 510, Total assets $1,000,000 Total equities $1,000,

Chapter 1 13

Solution P1-5 (continued)

2 Celistia Corporation Balance Sheet at January 2, 2006 (after business combination)

Assets Current Assets Cash $ 2,590, Accounts receivable — net 1,660, Notes receivable — net 1,800, Inventories 3,000, Other current assets 900,000 $ 9,950,

Plant Assets Land $ 2,190, Buildings — net 10,140, Equipment — net 10,570,000 22,900, Total assets $32,850,

Liabilities and Stockholders’ Equity

Liabilities Accounts payable $ 1,300, Mortgage payable, 10% 5,600,000 $ 6,900,

Stockholders’ Equity Capital stock, $10 par $11,000, Other paid-in capital 8,950, Retained earnings 6,000,000 25,950, Total liabilities and stockholders’ equity $32,850,

Was this document helpful?

Advanced Accounting - Chapter 1

Course: Advanced Financial Accounting (ACCT 4314)

University: University of Arkansas at Little Rock

Was this document helpful?
Chapter 1 1
Chapter 1
BUSINESS COMBINATIONS
Answers to Questions
1A business combination is a union of business entities in which two or more previously separate and
independent companies are brought under the control of a single management team. FASB Statement No.
141 describes three situations that establish the control necessary for a business combination, namely,
when one or more corporations become subsidiaries, when one company transfers its net assets to
another, and when each combining company transfers its net assets to a newly formed corporation.
2The dissolution of all but one of the separate legal entities is not necessary for a business combination.
An example of one form of business combination in which the separate legal entities are not dissolved is
when one corporation becomes a subsidiary of another. In the case of a parent-subsidiary relationship,
each combining company continues to exist as a separate legal entity even though both companies are
under the control of a single management team.
3A business combination occurs when two or more previously separate and independent companies are
brought under the control of a single management team. Merger and consolidation in a generic sense are
frequently used as synonyms for the term business combination. In a technical sense, however, a merger
is a type of business combination in which all but one of the combining entities are dissolved and a
consolidation is a type of business combination in which a new corporation is formed to take over the
assets of two or more previously separate companies and all of the combining companies are dissolved.
4Goodwill arises in a business combination accounted for under the purchase method when the cost of the
investment (price paid plus direct costs) exceeds the fair value of identifiable net assets acquired. Under
FASB Statement No. 142, goodwill is no longer amortized for financial reporting purposes and will have
no effect on net income, unless the goodwill is deemed to be impaired. If goodwill is impaired, a loss will
be reocnized.
5Negative goodwill is the opposite of goodwill. It results from a purchase business combination in which
the fair value of identifiable net assets acquired exceeds the investment cost. Any negative goodwill must
be applied to a proportionate reduction of noncurrent assets other than marketable securities. If negative
goodwill is greater than the fair value of all noncurrent assets acquired other than marketable securities,
the excess is written off as an extraordinary loss on the income statement under FASB Statement No. 141.
1

Students also viewed

Related documents