Advanced Accounting, 13th Edition Floyd A Beams Testbank and Solution Manual by TBtutors

Type:

Test Bank and Solution Manual

Resource:

Advanced Accounting

Edition:

13th Edition

Author(s):

Floyd A. Beams Joseph H. Anthony Bruce Bettinghaus Kenneth Smith

Chapter 1 BUSINESS COMBINATIONS Learning Objectives 1.1 Understand the economic motivations underlying business combinations. 1.2 Learn about alternative forms of business combinations, from both the legal and accounting perspectives. 1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method. 1.4 See how firms record fair values of assets and liabilities in an acquisition. 1.5 Appendix: Review accounting concepts for a pooling of interests.

Chapter Outline A BUSINESS COMBINATION IS THE UNION OF PREVIOUSLY SEPARATE BUSINESS ENTITIES. A

Horizontal integration is the combination of firms in the same business lines and markets.

Vertical integration is the combination of firms in the same business, but with operations in different, successive, stages of production and/or distribution.

Conglomeration is the combination of firms with unrelated and diverse products and/or service functions.

Reasons for business combinations: (Learning Objective 1.1) 1 2 3 4 5 6

Cost advantage – frequently less expensive to acquire rather than build facilities or develop R&D Lower risk - usually less risky to acquire product lines or markets rather than develop new products, particularly if the goal is diversification Fewer operating delays - facilities are already in place, which shortens the time to market Avoidance of takeovers – some businesses, especially small ones, combine to prevent takeovers Acquisition of intangible assets – acquiring patents, mineral rights, research, databases, or management expertise can be a primary factor Other reasons – combination may offer business tax advantages, such as taxloss carryforwards, or personal income and/or estate-tax advantages

ANTITRUST LAWS PROHIBIT BUSINESS COMBINATIONS THAT RESTRAIN TRADE OR IMPAIR COMPETITION. A

Proposed business combinations are reviewed by federal agencies, and sometimes approval from more than one is required. U.S. federal agencies that may review business combinations include the Department of Justice, the Federal Trade Commission, the Federal Reserve Board, the Department of Transportation, the Federal Communications Commission, and the Securities and Exchange Commission.

State agencies typically review business combinations for possible violations of state regulations. However, some states have antitrust exemption laws to protect hospitals in pursuit of cooperative projects.

Some companies argue that the decreased competition caused by mergers is offset by lower prices and better products.

LEGAL FORM OF BUSINESS COMBINATIONS (Learning Objective 1.2) A

Acquisition: 1 2

One corporation acquires the productive assets of another business entity and integrates those assets into its own operations (see B & C below); or One corporation obtains operating control over the productive facilities of another entity by acquiring a majority of its outstanding voting stock. A+B=A+B

(usually requires consolidated statements)

Merger: One corporation takes over all the operations of another business entity and that entity is dissolved (see Illustration 1-1). A+B=A

Consolidation: A new corporation is formed to take over the assets and operations of two or more separate business entities and all the combining companies are dissolved (see Illustration 1-1).

Previously separate businesses are brought together into one entity when their business resources and operations come under control of a single management team. That control is established when: 1

One or more corporations becomes a subsidiary (i.e., when another corporation acquires a majority of its outstanding voting stock);

One company transfers its net assets to another; or

Each company transfers its net assets to a newly formed corporation.

Merger, consolidation, and acquisition are often used in a generic sense as synonyms for business combinations. The term "consolidation" also refers to the accounting process of combining a parent company’s financial statements with those of its subsidiaries.

A subsidiary is formed when another corporation acquires a majority (more than 50%) of its outstanding voting stock.

BACKGROUND ON BUSINESS COMBINATION ACCOUNTING 1

The pooling of interests method of accounting was eliminated for all transactions initiated after June 30, 2001. All subsequent combinations must use the acquisition method.

2 Prior combinations accounted for by the pooling of interests method were allowed to continue as acceptable financial reporting practice for past business combinations. 3

Pooling provides less relevant information to statement users, ignores economic value exchanged in the transaction, and makes subsequent performance evaluation impossible.

Problems occur because the pooling method uses historical book values to record combinations instead of fair values of net assets. GAAP prefers fair values in asset acquisitions.

Elimination of pooling makes U. S. GAAP more consistent with international accounting standards. Most major economies prohibit the use of the pooling of interests method.

ACCOUNTING FOR COMBINATIONS AS ACQUISITIONS (Learning Objective 1.3) A

All business combinations initiated after 12/15/08 follow the same GAAP used in recording the purchase of other assets and liabilities, which is the acquisition method. 1

Cost is measured by the cash disbursed, the fair value of other assets distributed, or the fair value of securities issued (fair value principle).

Direct costs of acquisition:

Direct costs of registering and issuing securities are charged against additional paid-in capital.

All other direct costs of combining (accounting, consulting, and legal fees) are expensed.

Indirect costs are also expenses, such as management salaries, depreciation, rent, or closing a duplicate facility.

Recording Fair Values in an Acquisition (Learning Objective 1.4) – steps to record an acquisition: a

Determine the fair values of all identifiable tangible and intangible assets acquired and liabilities assumed. This is often done before the combination by independent appraisers and valuation experts.

GAAP provides specific guidelines for valuing assets and liabilities.

All identifiable assets and liabilities are valued regardless of whether they are recorded on the books of the acquired company (e.g., a patent where all R&D was expensed as incurred).

Assets and liabilities that arise from contingencies should be recognized at fair value if fair value can be reasonably estimated.

Exceptions to fair value include deferred tax assets and liabilities, pensions and other benefits, and leases. These items should be accounted for pursuant to specific accounting principles governing these items.

No value is assigned to goodwill recorded on the books of the acquired company. Goodwill is an unidentifiable asset, and any goodwill will be determined by the combination itself, not historical transactions.

The acquiring company records the assets received and liabilities assumed at their fair values. a

First, fair values are assigned to all identifiable tangible and intangible assets acquired and liabilities assumed. (1) See text Exhibit 1-2 for a list of intangible assets that meet the criteria for recognition. Recognizable intangible assets must meet either a separability criterion or a contractual-legal criterion. (2) Separability means that the asset can be separated/divided from the acquiree and sold or transferred.

If cost is greater than fair value of the identifiable net assets acquired, the excess cost is assigned to goodwill.

If fair value is greater than cost, the excess fair value is recorded as an ordinary gain by the acquirer.

Contingent Consideration in an Acquisition a

Contingent consideration is an additional payment made to the previous stockholders of the acquired company contingent on future events or transactions. The contingent consideration may include the distribution of cash, other assets, or the issuance of debt or equity securities.

Contingent consideration must be measured and recorded at fair value as of the acquisition date as part of the consideration transferred in the acquisition.

If the contingent consideration is to be paid in additional shares to the acquiree, it is in the form of equity, and the Investment and Paid-inCapital accounts are increased by the fair value of the contingent consideration.

If the contingent consideration is to be paid in cash to the acquiree, the Investment and Liability accounts are increased by the fair value of the contingent consideration.

Subsequent changes in fair value of contingent consideration: If equity, then do not remeasure fair value at each reporting date until contingency is resolved. If liability, acquirer measures fair value at each reporting date until resolved.

Changes in the fair value of the contingent consideration are reported as a gain or loss in earnings, with corresponding adjustments to the liability. Cost and Fair Value Compared

After fair values are assigned to all identifiable assets and assumed liabilities, compare the investment cost with the total fair value of identifiable assets less liabilities.

If investment cost > net fair value, then assign the excess to identifiable net assets according to their fair value and the rest to goodwill.

If investment cost < total fair value of assets less liabilities, then the gain is a bargain purchase and is recognized as an ordinary gain by acquirer.

THE GOODWILL CONTROVERSY A

Goodwill is defined as the excess of the investment cost over the fair value of net assets received.

The theory behind goodwill is that it represents a measure of the present value of the combined company’s future excess earnings over the normal earnings of a similar business.

Goodwill is no longer amortized for financial reporting purposes. In certain cases, it can be amortized and deducted over 15 years.

Firms must periodically assess goodwill for value impairment. Impairment occurs when the recorded value of goodwill is greater than its fair value.

When impairment occurs, firms must write down goodwill to a new estimated amount and record a loss in calculating net income of a period.

The treatment of goodwill has not retroactively changed, but firms will cease amortizing all previously recorded goodwill.

Goodwill and all other intangibles that have indefinite useful lives will be periodically reviewed (at least annually) and adjusted for value impairment but no longer amortized.

GAAP also defines the reporting entity in accounting for intangible assets. 1 Firms will treat goodwill and other intangible assets as assets of the business reporting unit. 2 These intangible assets will be reported based on their fair value at acquisition date.

Costs for internally developing, maintaining, or restoring intangible assets that are not specifically identifiable, have indeterminate lives or are inherent in a continuing business and relate to the entity as a whole, are expensed as incurred.

Recognizing and measuring impairment losses related to goodwill is a two-step process. 1 The first step compares carrying (book) values to fair values at the business reporting unit level. If fair value is less than book value, impairment has occurred.

The second step measures the impairment. The carrying value of goodwill is compared to its implied fair value. The excess book value over implied fair value is the impairment loss. The loss cannot exceed the book value of the goodwill. Previously recognized impairment losses cannot be reversed.

The impairment test is conducted at least annually, and more frequently if certain conditions warrant.

Amortization versus non-amortization 1

Amortization is required for intangible assets with a definite useful life.

The method of amortization should reflect the expected pattern of consumption of the economic benefits of the intangible asset.

If a pattern is not determinable, straight-line amortization is acceptable.

Firms will not amortize intangibles with an indefinite life that cannot be estimated. Like goodwill, these assets should be periodically evaluated for possible impairments.

DISCLOSURE REQUIREMENTS A

Financial statement disclosures for a business combination should include the following: 1 The name and a brief description of the acquired company, acquisition date, the portion of voting stock acquired, reason for the acquisition, and the manner in which acquirer obtained control; 2 Information about goodwill or a gain from a bargain purchase; 3 Nature, terms, and fair value of consideration transferred; 4 Details about assets acquired, liabilities assumed, and any noncontrolling interests;

5 Reduction in acquirer’s pre-existing deferred tax asset valuation allowance due to the business combination; 6 Information about transactions with the acquiree accounted for separately from the business combination; 7 Details about step acquisitions; 8 In the case of a public company acquirer, pro-forma information. B

In addition, GAAP requires the following: 1 Material aggregate amounts of goodwill must be reported as a separate balance sheet item. 2

Goodwill impairment losses must be shown separately on the income statement as a component of income from continuing operations.

GAAP also provides increased disclosure requirements for intangibles (see text Exhibit 1-3).

SARBANES-OXLEY ACT OF 2002 A

After the high-profile collapses of WorldCom, Enron, and other companies, Congress enacted the Sarbanes-Oxley Act of 2002 (SOX) to prevent future financial reporting and auditing abuses.

The rules focus primarily on corporate governance, auditing, and internal control issues.

SOX has far-reaching implications: 1

Establishing the independent Public Company Accounting Oversight Board (PCAOB) to regulate the accounting and auditing professions

Requiring greater independence of auditors to their audit clients, including restrictions on consulting and advisory services

Requiring greater independence and oversight responsibilities for corporate boards of directors

Requiring the CEO and CFO to certify an entity’s financial statements and internal controls

Requiring independent auditors to review and attest to management’s internal control assessments

Increasing disclosures relating to off-balance sheet arrangements and contractual obligations

Increasing the types of items that require disclosure on Form 8-K and shortening the filing period

Text Exhibit 1-5 provides an example of management’s responsibility for financial results and report on internal control.

APPENDIX: POOLING OF INTERESTS ACCOUNTING (Learning Objective 1.5) A B C

Pooling of interests accounting for business combinations is a thing of the past under U.S. GAAP (ASC 805). No new pooling combinations may be recorded after 2001. Earlier pooling combinations have been grandfathered in. There are five conditions for pooling: 1

3 4 5

The pooling of interests concept was based on the assumption that it was possible to unite ownership interests through the exchange of equity securities without an acquisition of one company combining with another. This method was limited to those business combinations in which the combining entities exchanged equity securities and the ownership interests continued in the new accounting entity. None of the combining companies changed the equity interest of the voting common stock within two years before initiation of the combination. Combining companies reacquired shares of voting common stock only for purposes other than business combination. Proportionate interest of each individual common stockholder is required to remain the same as a result of the exchange of stock to affect the combination.

Description of assignment material

Minutes

Questions (5) Exercises (5) El-1 4 MC general El-2 AICPA 2 MC problem-type El-3 Prepare stockholders’ equity section El-4 Journal entries to record an acquisition El-5 Journal entries to record an acquisition with direct costs and fair value/book value differences EI-6* Journal entries to record business combinations EI-7* Journal entries to record a pooling Problems (5) Pl-1 Prepare balance sheet after acquisition Pl-2 Prepare balance sheet after an acquisition Pl-3 Journal entries and balance sheet for an acquisition Pl-4 Allocation schedule and balance sheet Pl-5 Journal entries and balance sheet for an acquisition Pl-6* Prepare balance sheets of pooled companies P1-7* Journal entries to record pooling business combinations P1-8* Journal entries and balance sheet for a pooling of interests

5 10 15 20 15 20 20

20 20 20 30 35 35 35 45

PROFESSIONAL RESEARCH ASSIGNMENTS Answer the following questions by reference to the FASB Codification of Accounting Standards. Include the appropriate reference in your response. PR 1-1 What are the required disclosures related to goodwill included in the consolidated balance sheet? PR 1-2 Does current GAAP provide any exceptions to the fair-value measurement principle for business combinations?

Illustration 1-1

DIAGRAM OF BASIC TYPES OF BUSINESS COMBINATIONS MERGER

Company A (Surviving Entity)

Net Assets of B

Company B (Dissolved Entity)

Company A may acquire the net assets of Company B by issuing debt or equity securities or assets directly to Company B for B's net assets or to B's stockholders for all of B's outstanding stock. In either case, Company B is dissolved, and Company A takes over the net assets of Company B. A+B=A CONSOLIDATION Net Assets of B

Company B (Dissolved Entity)

Company A (New Entity) Net Assets of C

Company C (Dissolved Entity)

Company A may acquire the net assets of Company B and Company C by issuing stock directly to Companies B and C for their net assets or to the stockholders of Companies B and C for all of their stock. In either case, Companies B and C are dissolved, and Company A takes over their assets. A+B=C ACQUISITION OF NET ASSETS WITHOUT DISSOLUTION Copyright ©2018 Pearson Education, Inc.

Company A (Acquiring Entity)

All or a major portion of B's operating assets Company B

Same as for a merger or consolidation except that Company A issues debt or equity securities or assets directly to Company B, and Company B continues to exist as a separate legal entity.

ACQUISITION OF OUTSTANDING STOCK

(Parent-subsidiary operations and consolidated financial statements)

Over 50% of Stock of B

Company A (Parent)

Company B (Subsidiary)

Similar to a merger or consolidation except that Company A receives a majority of the outstanding voting stock of Company B by issuing debt or equity securities or assets to the stockholders of Company B. Company B continues to exist as a separate legal entity and to operate in a parentsubsidiary relationship with Company A. A+B=A+B

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. Three situations 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.

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.

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.

Goodwill arises in a business combination accounted for under the acquisition method when the cost of the investment (fair value of the consideration transferred) exceeds the fair value of identifiable net assets acquired. Under GAAP, goodwill is not 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 recognized.

A bargain purchase occurs when the acquisition price is less than the fair value of the identifiable net assets acquired. The acquirer records the gain from a bargain purchase as an ordinary gain during the period of the acquisition. The gain equals the difference between the investment cost and the fair value of the identifiable net assets acquired.

1-2

Business Combinations

SOLUTIONS TO EXERCISES Solution E1-1 1 2 3 4

a b a d

Solution E1-2 [AICPA adapted] 1

a Plant and equipment should be recorded at the $220,000 fair value.

c Investment cost Less: Fair value of net assets Cash Inventory Property and equipment — net Liabilities Goodwill

$1,600,000 $

160,000 380,000 1,120,000 (360,000) $

1,300,000 300,000

Solution E1-3 Stockholders’ equity — Pop Corporation on January 3 Capital stock, $10 par, 600,000 shares outstanding

$ 6,000,000

Other paid-in capital [$400,000 + $3,000,000 – $10,000]

3,390,000

Retained earnings [$1,200,000 - $20,000] Total stockholders’ equity

1,180,000 $10,570,000

Entry to record combination Investment in Son Capital stock, $10 par Other paid-in capital

6,000,000 3,000,000 3,000,000

Investment expense Other paid-in capital Cash Check: Net assets per books (book value) Goodwill and write-up of assets Less: Expense of direct costs

20,000 10,000 30,000 $ 7,600,000 3,000,000 (20,000)

Less: Issuance of stock (10,000) $10,570,000

Chapter 1

1-3

Solution E1-4 Journal entries on Pam’s books to record the acquisition Investment in Sun 10,200,000 Common stock, $10 par 4,800,000 Additional paid-in capital 5,400,000 To record issuance of 480,000 shares of $10 par common stock with a fair value of $10,200,000 for the common stock of Sun in a business combination. Additional paid-in capital 60,000 Investment expenses 180,000 Other assets (or Cash) 240,000 To record costs of registering and issuing securities as a reduction of paidin capital, and record direct and indirect costs of combination as expenses. Current assets 4,400,000 Plant assets 8,800,000 Liabilities 1,200,000 Investment in Sun 10,200,000 Gain from bargain purchase 1,800,000 To record allocation of the $10,200,000 cost of Sun Company to identifiable assets and liabilities according to their fair values, and the gain from the bargain purchase,computed as follows: Cost $10,200,000 Fair value of net assets acquired 12,000,000 Bargain purchase amount $ 1,800,000

1-4

Business Combinations

Solution E1-5 Journal entries on the books of Pop Corporation to record merger with Son Corporation Investment in Son 1,060,000 Common stock, $10 par 360,000 Additional paid-in capital 300,000 Cash 400,000 To record issuance of 36,000 common shares and payment of cash in the acquisition of Son Corporation in a merger. Investment expenses 140,000 Additional paid-in capital 60,000 Cash 200,000 To record costs of registering and issuing securities and additional direct costs of combination. Cash 80,000 Inventories 200,000 Other current assets 40,000 560,000 Plant assets — net Goodwill 320,000 Current liabilities 60,000 Other liabilities 80,000 Investment in Son 1,060,000 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 Fair value of net assets acquired Goodwill Solution E1-6* Net assets (+A) Common stock (+SE) Additional paid-in capital (+SE) Retained earnings (+SE) Expenses (E, -SE) Cash (-A)

$1,060,000 740,000 $ 320,000 2,200 1,200 800 200 60 60

Solution E1-7* Net assets (+A) Capital stock (+SE) Retained earnings (+SE) Investment in Sun Corporation (-A)

2,100

1,470 600 30

Chapter 1

1-5

SOLUTIONS TO PROBLEMS Solution P1-1 (in thousands) Preliminary computations Fair Value: Cost of investment in Son at January 2 (240,000 shares  $40) Book value of net assets ($8,000 - $960) Excess fair value over book value Excess assigned to: Current assets Remainder to goodwill Excess fair value over book value

$9,600 (7,040) $2,560 $

640 1,920 $2,560

Note: $400,000 direct costs of combination are expensed. The excess fair value of Pop’s buildings is not considered.

Pop Corporation Balance Sheet at January 2, 2016 (in thousands) Assets Current assets ($2,080 + $960 + $640 excess - $640 direct costs)

$ 3,040

Land ($800 + $1,600)

2,400

Buildings — net ($4,800 + $1,600)

6,400

Equipment — net ($3,520 + $3,840)

7,360

Goodwill Total assets

1,920 $21,120

Liabilities and Stockholders’ Equity Current liabilities ($800 + $960)

$ 1,760

Capital stock, $10 par ($8,000 + $2,400 new issue)

10,400

Additional paid-in capital [$800 + ($30  240 shares) — $240 costs of issuing and registering securities]

7,760

Retained earnings (subtract $400 expensed direct cost) Total liabilities and stockholders’ equity

1,200 $ 21,120

1-6

Business Combinations

Solution P1-2 Preliminary computations Fair Value: Cost of acquiring Son Fair value of assets acquired and liabilities assumed Goodwill from acquisition of Son

$1,650,000 1,340,000 $ 310,000

Pop Corporation Balance Sheet at January 2, 2016 Assets Current assets Cash [$300,000 + $60,000 - $280,000 expenses paid]

80,000 540,000

Accounts receivable — net [$460,000 + $80,000 fair value] Inventories [$1,040,000 + $240,000 fair value]

1,280,000

Plant assets Land [$800,000 + $300,000 fair value]

1,100,000

Buildings — net [$2,000,000 + $600,000 fair value]

2,600,000

Equipment — net [$1,000,000 + $500,000 fair value]

1,500,000

Goodwill Total assets

310,000 $7,410,000

Liabilities and Stockholders’ Equity Liabilities Accounts payable [$600,000 + $80,000] Note payable [$1,200,000 + $360,000 fair value]

680,000 1,560,000

Stockholders’ equity Capital stock, $10 par [$1,600,000 + (66,000 shares  $10)]

2,260,000

Other paid-in capital [$1,200,000 - $80,000 + ($1,650,000 - $660,000)]

2,110,000

Retained earnings (subtract $200,000 expensed direct costs) Total liabilities and stockholders’ equity

800,000 $7,410,000

Chapter 1

1-7

Solution P1-3 Pam issues 25,000 shares of stock for Sun’s outstanding shares 1a

Investment in Sun 1,500,000 Capital stock, $10 par 250,000 Additional paid-in capital 1,250,000 To record issuance of 25,000, $10 par shares with a market price of $60 per share in a business combination with Sun. Investment expenses 60,000 Additional paid-in capital 40,000 Cash 100,000 To record costs of combination in a business combination with Sun. Cash 20,000 Inventories 120,000 Other current assets 200,000 Land 200,000 700,000 Plant and equipment — net Goodwill 360,000 Liabilities 100,000 Investment in Sun 1,500,000 To assign investment cost to identifiable assets and liabilities according to their fair values and the remainder to goodwill. Goodwill is computed: $1,500,000 cost - $1,140,000 fair value of net assets acquired.

Pam Corporation Balance Sheet January 2, 2016 (after business combination) Assets Cash [$240,000 + $20,000 - $100,000] Inventories [$100,000 + $120,000] Other current assets [$200,000 + $200,000] Land [$160,000 + $200,000] Plant and equipment — net [$1,300,000 + $700,000] Goodwill Total assets Liabilities and Stockholders’ Equity Liabilities [$400,000 + $100,000] Capital stock, $10 par [$1,000,000 + $250,000] Additional paid-in capital [$400,000 + $1,250,000 $40,000] Retained earnings (subtract $60,000 direct costs) Total liabilities and stockholders’ equity

160,000 220,000 400,000 360,000 2,000,000 360,000 $3,500,000 $

500,000 1,250,000 1,610,000

140,000 $3,500,000

1-8

Business Combinations

Solution P1-3 (continued) Pam issues 15,000 shares of stock for Sun’s outstanding shares 2a

900,000 Investment in Sun (15,000 shares  $60) Capital stock, $10 par 150,000 Additional paid-in capital 750,000 To record issuance of 15,000, $10 par common shares with a market price of $60 per share. Investment expense 60,000 Additional paid-in capital 40,000 Cash 100,000 To record costs of combination in the acquisition of Sun. Cash 20,000 Inventories 120,000 Other current assets 200,000 Land 200,000 700,000 Plant and equipment — net Liabilities 100,000 Investment in Sun 900,000 Gain on bargain purchase 240,000 To record Sun’s net assets at fair values and the gain on the bargain purchase.

Fair value of net assets acquired Investment cost (Fair value of consideration) Gain on Bargain Purchase 2b

$1,140,000 900,000 $ 240,000

Pam Corporation Balance Sheet January 2, 2016 (after business combination) Assets Cash [$240,000 + $20,000 - $100,000] Inventories [$100,000 + $120,000] Other current assets [$200,000 + $200,000] Land [$160,000 + $200,000] Plant and equipment — net [$1,300,000 + $700,000] Total assets Liabilities and stockholders’ equity Liabilities [$400,000 + $100,000] Capital stock, $10 par [$1,000,000 + $150,000] Additional paid-in capital [$400,000 + $750,000 $40,000] Retained earnings (subtract $60,000 direct costs and add $240,000 Gain from bargain purchase) Total liabilities and stockholders’ equity

160,000 220,000 400,000 360,000 2,000,000 $3,140,000 $

500,000 1,150,000 1,110,000 380,000

$3,140,000

Chapter 1

1-9

Solution P1-4 1

Schedule to allocate investment cost to assets and liabilities Investment cost (fair value), January 1 Fair value acquired from Son ($360,000  100%) Excess fair value over cost (bargain purchase gain)

$300,000 360,000 $ 60,000

Allocation: Allocation 10,000 20,000 30,000 100,000 150,000 150,000 (30,000) (70,000) (60,000) $ 300,000

Cash Receivables — net Inventories Land Buildings — net Equipment — net Accounts payable Other liabilities Gain on bargain purchase Totals

Pop Corporation Balance Sheet at January 1, 2016 (after combination) Liabilities

Assets Cash Receivables — net Inventories Land Buildings — net Equipment — net

25,000 60,000 150,000 145,000 350,000 330,000

Total assets $1,060,000

Accounts payable Note payable (5 years) Other liabilities Liabilities

120,000 200,000 170,000 490,000

Stockholders’ Equity Capital stock, $10 par Other paid-in capital Retained earnings* Stockholders’ equity Total equities

300,000 100,000 170,000 570,000 $1,060,000

* Retained earnings reflects the $60,000 gain on the bargain purchase.

1-10

Business Combinations

Solution P1-5 1

Journal entries to record the acquisition of Sun Corporation Investment in Sun 10,000,000 Capital stock, $10 par 2,000,000 Other paid-in capital 6,000,000 Cash 2,000,000 To record acquisition of Sun for 200,000 shares of common stock and $2,000,000 cash. Investment expense 400,000 Other paid-in capital 200,000 Cash 600,000 To record payment of costs to register and issue the shares of stock ($200,000) and other costs of combination ($400,000). Cash 960,000 Accounts receivable 1,440,000 Notes receivable 1,200,000 Inventories 2,000,000 Other current assets 800,000 Land 800,000 Buildings 4,800,000 Equipment 2,400,000 Accounts payable 1,200,000 Mortgage payable, 10% 2,400,000 Investment in Sun 10,000,000 Gain on bargain purchase 800,000 To record the net assets of Sun at fair value and the gain on the bargain purchase. Gain on Bargain Purchase Calculation Acquisition price Fair value of net assets acquired Gain on bargain purchase

$10,000,000 10,800,000 $ 800,000