Type:
Solution Manual
Resource:
Advanced Accounting
Edition:
10th Edition
Author(s):
Floyd A. Beams Robin P. Clement Joseph H. Anthony Suzanne Lowensohn
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. 141R 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 acquisition method when the cost of the investment (fair value of the consideration transferred) 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
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 amount as an extraordinary gain during the period of the acquisition, under FASB Statement No. 141R.
. 1-1
1-2
Business Combinations
SOLUTIONS TO EXERCISES Solution E1-1 1 2 3 4 5
a b a a d
Solution E1-2 [AICPA adapted] 1
a Plant and equipment should be recorded at the $55,000 fair value.
2
c Investment cost Less: Fair value of net assets Cash Inventory Property and equipment — net Liabilities Goodwill
$800,000 $ 80,000 190,000 560,000 (180,000)
650,000 $150,000
Solution E1-3 Stockholders’ equity — Pillow Corporation on January 3 Capital stock, $10 par, 300,000 shares outstanding
$3,000,000
Additional paid-in capital [$200,000 + $1,500,000 – $5,000]
1,695,000
Retained earnings Total stockholders’ equity
600,000 $5,295,000
Entry to record combination Investment in Sleep-bank Capital stock, $10 par Additional paid-in capital
3,000,000 1,500,000 1,500,000
Investment expense Additional paid-in capital Cash Check: Net assets per books Goodwill Less: Expense of direct costs Less: Issuance of stock
.
10,000 5,000 15,000 $3,800,000 1,510,000 (10,000) (5,000) $5,295,000
Chapter 1
1-3
Solution E1-4 Journal entries on IceAge’s books to record the acquisition Investment in Jester 2,550,000 Common stock, $10 par 1,200,000 Additional paid-in capital 1,350,000 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 business combination. Additional paid-in capital 15,000 Investment expenses 45,000 Other assets 60,000 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 1,100,000 Plant assets 2,200,000 Liabilities 300,000 Investment in Jester 3,000,000 To record allocation of the $2,550,000 cost of Jester Company to identifiable assets and liabilities according to their fair values, computed as follows: Cost $2,550,000 Fair value acquired 3,000,000 Bargain purchase amount $ 450,000 Investment in Jester Gain from bargain purchase To record gain from bargain purchase.
.
450,000 450,000
1-4
Business Combinations
Solution E1-5 Journal entries on the books of Danders Corporation to record merger with Harrison Corporation Investment in Harrison 530,000 Common stock, $10 par 180,000 Additional paid-in capital 150,000 Cash 200,000 To record issuance of 18,000 common shares and payment of cash in the acquisition of Harrison Corporation in a merger. Investment expenses 70,000 Additional paid-in capital 30,000 Cash 100,000 To record costs of registering and issuing securities and additional direct costs of combination. Cash 40,000 Inventories 100,000 Other current assets 20,000 280,000 Plant assets — net Goodwill 160,000 Current liabilities 30,000 Other liabilities 40,000 Investment in Harrison 530,000 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 assets acquired Goodwill
.
$530,000 370,000 $160,000