Chapter 1                                      BUSINESS COMBINATIONSAnswers to Questions1      A business combination is a...
1-2                                                                 Business CombinationsSOLUTIONS TO EXERCISESSolution E1...
Chapter 1                                                               1-3            ©2009 Pearson Education, Inc. publi...
1-4                                                            Business CombinationsSolution E1-4Journal entries on IceAge...
Chapter 1                                                                     1-5Solution E1-5Journal entries on the books...
1-6                                                              Business CombinationsSOLUTIONS TO PROBLEMSSolution P1-1Pr...
Chapter 1                                                                     1-7Solution P1-2Preliminary computationsFair...
1-8                                                            Business CombinationsSolution P1-3Persis issues 25,000 shar...
Chapter 1                                                                      1-9Solution P1-3 (continued)Persis issues 1...
1-10                                                                  Business CombinationsSolution P1-41      Schedule to...
Chapter 1                                                                    1-11Solution P1-51       Journal entries to r...
1-12                                                              Business CombinationsSolution P1-5 (continued)2         ...
Chapter 1                                                                     1-13RESEARCH CASE    1. Journal entry to rec...
1-14                                                                                                   Business Combinatio...
Chapter 1                                                                                                                 ...
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  1. 1. Chapter 1 BUSINESS COMBINATIONSAnswers to Questions1 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. ©2009 Pearson Education, Inc. publishing as Prentice Hall 1-1
  2. 2. 1-2 Business CombinationsSOLUTIONS TO EXERCISESSolution E1-11 a2 b3 a4 a5 dSolution E1-2 [AICPA adapted]1 a Plant and equipment should be recorded at the $55,000 fair value.2 c Investment cost $800,000 Less: Fair value of net assets Cash $ 80,000 Inventory 190,000 Property and equipment — net 560,000 Liabilities (180,000) 650,000 Goodwill $150,000Solution E1-3Stockholders’ equity — Pillow Corporation on January 3Capital stock, $10 par, 300,000 shares outstanding $3,000,000Additional paid-in capital [$200,000 + $1,500,000 – $5,000] 1,695,000Retained earnings 600,000 Total stockholders’ equity $5,295,000Entry to record combinationInvestment in Sleep-bank 3,000,000 Capital stock, $10 par 1,500,000 Additional paid-in capital 1,500,000Investment expense 10,000Additional paid-in capital 5,000 Cash 15,000Check: Net assets per books $3,800,000 Goodwill 1,510,000 Less: Expense of direct costs (10,000) Less: Issuance of stock (5,000) $5,295,000 ©2009 Pearson Education, Inc. publishing as Prentice Hall
  3. 3. Chapter 1 1-3 ©2009 Pearson Education, Inc. publishing as Prentice Hall
  4. 4. 1-4 Business CombinationsSolution E1-4Journal entries on IceAge’s books to record the acquisitionInvestment 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 15,000Investment expenses 45,000 Other assets 60,000 To record costs of registering and issuing securities as a reduction of paid- in capital, and record direct and indirect costs of combination as expenses.Current assets 1,100,000Plant 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 $ 450,000Investment in Jester 450,000 Gain from bargain purchase 450,000 To record gain from bargain purchase. ©2009 Pearson Education, Inc. publishing as Prentice Hall
  5. 5. Chapter 1 1-5Solution E1-5Journal entries on the books of Danders Corporation to record merger withHarrison CorporationInvestment 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 70,000Additional paid-in capital 30,000 Cash 100,000 To record costs of registering and issuing securities and additional direct costs of combination.Cash 40,000Inventories 100,000Other current assets 20,000Plant assets — net 280,000Goodwill 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 $530,000 Fair value of assets acquired 370,000 Goodwill $160,000 ©2009 Pearson Education, Inc. publishing as Prentice Hall
  6. 6. 1-6 Business CombinationsSOLUTIONS TO PROBLEMSSolution P1-1Preliminary computationsFair Value: Cost of investment in Sain at January 2 (30,000 shares × $20) $600,000Book value (440,000)Excess fair value over book value $160,000Excess allocated to:Current assets $ 40,000Remainder to goodwill 120,000Excess fair value over book value $160,000Note: $25,000 direct costs of combination are expensed. The excess fair value of Pine’s buildings is not considered. Pine Corporation Balance Sheet at January 2, 2009AssetsCurrent assets ($130,000 + $60,000 + $40,000 excess - $40,000 direct costs) $ 190,000Land ($50,000 + $100,000) 150,000Buildings — net ($300,000 + $100,000) 400,000Equipment — net ($220,000 + $240,000) 460,000Goodwill 120,000Total assets $1,320,000Liabilities and Stockholders’ EquityCurrent liabilities ($50,000 + $60,000) $ 110,000Common stock, $10 par ($500,000 + $300,000) 800,000Additional paid-in capital [$50,000 + ($10 × 30,000 shares) — $15,000 costs of issuing 335,000 and registering securities]Retained earnings (subtract $25,000 expensed direct cost) 75,000 Total liabilities and stockholders’ equity $1,320,000 ©2009 Pearson Education, Inc. publishing as Prentice Hall
  7. 7. Chapter 1 1-7Solution P1-2Preliminary computationsFair Value: Cost of acquiring Seabird $825,000Fair value of assets acquired and liabilities assumed 670,000 Goodwill from acquisition of Seabird $155,000 Pelican Corporation Balance Sheet at January 2, 2009AssetsCurrent assetsCash [$150,000 + $30,000 - $140,000 expenses paid] $ 40,000Accounts receivable — net [$230,000 + $40,000 fair value] 270,000Inventories [$520,000 + $120,000 fair value] 640,000Plant assetsLand [$400,000 + $150,000 fair value] 550,000Buildings — net [$1,000,000 + $300,000 fair value] 1,300,000Equipment — net [$500,000 + $250,000 fair value] 750,000Goodwill 155,000 Total assets $3,705,000Liabilities and Stockholders’ EquityLiabilitiesAccounts payable [$300,000 + $40,000] $ 340,000Note payable [$600,000 + $180,000 fair value] 780,000Stockholders’ equityCapital stock, $10 par [$800,000 + (33,000 shares × $10)] 1,130,000Other paid-in capital [$600,000 - $40,000 + ($825,000 - $330,000)] 1,055,000Retained earnings (subtract $100,000 expensed direct costs) 400,000 Total liabilities and stockholders’ equity $3,705,000 ©2009 Pearson Education, Inc. publishing as Prentice Hall
  8. 8. 1-8 Business CombinationsSolution P1-3Persis issues 25,000 shares of stock for Sineco’s outstanding shares1a Investment in Sineco 750,000 Capital stock, $10 par 250,000 Other paid-in capital 500,000 To record issuance of 25,000, $10 par shares with a market price of $30 per share in a business combination with Sineco. Investment expenses 30,000 Other paid-in capital 20,000 Cash 50,000 To record costs of combination in a business combination with Sineco. Cash 10,000 Inventories 60,000 Other current assets 100,000 Land 100,000 Plant and equipment — net 350,000 Goodwill 180,000 Liabilities 50,000 Investment in Sineco 750,000 To record allocation of investment cost to identifiable assets and liabilities according to their fair values and the remainder to goodwill. Goodwill is computed: $750,000 cost - $570,000 fair value of net assets acquired.1b Persis Corporation Balance Sheet January 2, 2009 (after business combination) Assets Cash [$70,000 + $10,000] $ 80,000 Inventories [$50,000 + $60,000] 110,000 Other current assets [$100,000 + $100,000] 200,000 Land [$80,000 + $100,000] 180,000 Plant and equipment — net [$650,000 + $350,000] 1,000,000 Goodwill 160,000 Total assets $1,750,000 Liabilities and Stockholders’ Equity Liabilities [$200,000 + $50,000] $ 250,000 Capital stock, $10 par [$500,000 + $250,000] 750,000 Other paid-in capital [$200,000 + $500,000 - $20,000] 680,000 Retained earnings (subtract $30,000 direct costs) 70,000 Total liabilities and stockholders’ equity $1,750,000 ©2009 Pearson Education, Inc. publishing as Prentice Hall
  9. 9. Chapter 1 1-9Solution P1-3 (continued)Persis issues 15,000 shares of stock for Sineco’s outstanding shares2a Investment in Sineco (15,000 shares × $30) 450,000 Capital stock, $10 par 150,000 Other paid-in capital 300,000 To record issuance of 15,000, $10 par common shares with a market price of $30 per share. Investment expense 30,000 Other paid-in capital 20,000 Cash 50,000 To record costs of combination in the acquisition of Sineco. Cash 10,000 Inventories 60,000 Other current assets 100,000 Land 100,000 Plant and equipment — net 350,000 Liabilities 50,000 Investment in Sineco 570,000 To record Sineco’s net assets at fair values. Investment in Sineco 120,000 Gain on bargain purchase 120,000 To record gain on bargain purchase and adjust Investment in Sineco to reflect total fair value. Fair value of net assets acquired $570,000 Investment cost (Fair value of consideration) 450,000 Gain on Bargain Purchase $120,0002b Persis Corporation Balance Sheet January 2, 2009 (after business combination) Assets Cash [$70,000 + $10,000] $ 80,000 Inventories [$50,000 + $60,000] 110,000 Other current assets [$100,000 + $100,000] 200,000 Land [$80,000 + $100,000] 180,000 Plant and equipment — net [$650,000 + $350,000] 1,000,000 Total assets $1,570,000 Liabilities and stockholders’ equity Liabilities [$200,000 + $50,000] $ 250,000 Capital stock, $10 par [$500,000 + $150,000] 650,000 Other paid-in capital [$200,000 + $300,000 - $20,000] 480,000 Retained earnings (subtract $30,000 direct costs 190,000 and add $120,000 Gain from bargain purchase) Total liabilities and stockholders’ equity $1,570,000 ©2009 Pearson Education, Inc. publishing as Prentice Hall
  10. 10. 1-10 Business CombinationsSolution P1-41 Schedule to allocate investment cost to assets and liabilities Investment cost (fair value), January 1 $300,000 Fair value acquired from Sen ($360,000 × 100%) 360,000 Excess fair value over cost (bargain purchase gain) $ 60,000 Allocation: Allocation Cash $ 10,000 Receivables — net 20,000 Inventories 30,000 Land 100,000 Buildings — net 150,000 Equipment — net 150,000 Accounts payable (30,000) Other liabilities (70,000) Gain on bargain purchase (60,000) Totals $ 300,0002 Phule Corporation Balance Sheet at January 1, 2009 (after combination) Assets Liabilities Cash $ 25,000 Accounts payable $ 120,000 Receivables — net 60,000 Note payable (5 years) 200,000 Inventories 150,000 Other liabilities 170,000 Land 145,000 Liabilities 490,000 Buildings — net 350,000 Equipment — net 330,000 Stockholders’ Equity Capital stock, $10 par 300,000 Other paid-in capital 100,000 Retained earnings* 170,000 Stockholders’ equity 510,000 Total assets $1,060,000 Total equities $1,060,000* Retained earnings reflects the $60,000 gain on the bargain purchase. ©2009 Pearson Education, Inc. publishing as Prentice Hall
  11. 11. Chapter 1 1-11Solution P1-51 Journal entries to record the acquisition of Dawn Corporation Investment in Dawn 2,500,000 Capital stock, $10 par 1,000,000 Other paid-in capital 1,000,000 Cash 500,000 To record acquisition of Dawn for 100,000 shares of common stock and $500,000 cash. Investment expense 100,000 Other paid-in capital 50,000 Cash 150,000 To record payment of costs to register and issue the shares of stock ($50,000) and other costs of combination ($100,000). Cash 240,000 Accounts receivable 360,000 Notes receivable 300,000 Inventories 500,000 Other current assets 200,000 Land 200,000 Buildings 1,200,000 Equipment 600,000 Accounts payable 300,000 Mortgage payable, 10% 600,000 Investment in Dawn 2,700,000 To record the net assets of Dawn at fair value. Investment in Dawn 200,000 Gain on bargain purchase 200,000 To adjust Investment account to total fair value and recognize the gain from the bargain purchase. Gain on Bargain Purchase Calculation Acquisition price $2,500,000 Fair value of net assets acquired 2,700,000 Gain on bargain purchase $ 200,000 ©2009 Pearson Education, Inc. publishing as Prentice Hall
  12. 12. 1-12 Business CombinationsSolution P1-5 (continued)2 Celistia Corporation Balance Sheet at January 2, 2009 (after business combination) Assets Current Assets Cash $ 2,590,000 Accounts receivable — net 1,660,000 Notes receivable — net 1,800,000 Inventories 3,000,000 Other current assets 900,000 $ 9,950,000 Plant Assets Land $ 2,200,000 Buildings — net 10,200,000 Equipment — net 10,600,000 23,000,000 Total assets $32,950,000 Liabilities and Stockholders’ Equity Liabilities Accounts payable $ 1,300,000 Mortgage payable, 10% 5,600,000 $ 6,900,000 Stockholders’ Equity Capital stock, $10 par $11,000,000 Other paid-in capital 8,950,000 Retained earnings* 6,000,000 26,050,000 Total liabilities and stockholders’ equity $32,950,000* Subtract $100,000 direct combination costs and add $200,000 gain on bargain purchase. ©2009 Pearson Education, Inc. publishing as Prentice Hall
  13. 13. Chapter 1 1-13RESEARCH CASE 1. Journal entry to record the acquisition (in millions of $) Investment in Target 50,000 Common stock, $0.10 par 100 Additional paid-in capital 49,900 To record acquisition of Target for 1 billion shares of common stock having a fair value of $50 per share. Cash 240,000 Accounts receivable 360,000 Notes receivable 300,000 Inventories 500,000 Other current assets 200,000 Land 190,000 Buildings 1,140,000 Equipment 570,000 Accounts payable 300,000 Mortgage payable, 10% 600,000 Investment in Target 2,600,000 Assign the excess of fair value over book value of assets and liabilities as shown in the following allocation schedule: Acquisition price $50,000 Excess fair value of assets acquired Inventory (10%) 625 Land (20%) 987 Buildings and improvements (20%) 3,222 Fixtures and equipment (20%) 711 Computer hardware and software (20%) 438 21,859 Goodwill $ 28,141 ©2009 Pearson Education, Inc. publishing as Prentice Hall
  14. 14. 1-14 Business Combinations 2. Consolidated Balance Sheet at January 31, 2007 WAL- CONSOL (millions, exce pt footnot e s) MART TARGET DR CR I-DATED Ass e t s Cash and cash equivale nt s 7,373 813 8,186 Accounts receiva ble, net 2,840 6,194 9,034 Inventor y 33,685 6,254 625 40,564 Other curre nt asse t s 2,690 1,445 4,135 Total curre nt asse ts 46,588 14,706 61,294 Proper ty and equipm e n t Land 18,612 4,934 987 24,533 Buildings and improve m e n t s 64,052 16,110 3,222 83,384 Fixtur e s and equip me n t 25,168 3,553 711 29,432 Comput e r hardw a r e and softwar e 2,188 438 2,626 Construc tion- in-progr e s s 1,596 1,596 Transpor t a tion equip me n t 1,966 1,966 Accumula t e d depr e cia tion (24,408) (6,950) (31,358) Proper ty and equipm e n t, net 85,390 21,431 106,821 Proper ty Under Capital Lease 5,392 5,392 Less: Accumula t e d amortiza tion (2,342) (2,342) Proper ty Under Lease - net 3,050 3,050 28,14 Goodwill 13,759 1 41,900 50,00 Invest m e n t in Targe t 50,000 0 0 Other non- curre nt asse ts 2,406 1,212 3,618 Total as s e t s 20 1 , 1 9 3 37, 3 4 9 23 8 , 5 4 2 Liabiliti e s an d sh ar e h o l d e r s inv e s t m e n t Comme r cial Paper 2,570 2,570 Accounts paya ble 28,090 6,575 34,665 Accrue d and other curre nt liabilities 14,675 2,758 17,433 Income taxe s paya ble 706 422 1,128 Current portion of long- ter m debt and note s paya ble 5,428 1,362 6,790 Current obligations capital lease s 285 285 Total curre nt liabilities 51,754 11,117 62,871 Long- ter m debt 27,222 8,675 35,897 Long ter m capital lease s 3,513 3,513 Deferre d income taxe s 4,971 577 5,548 Noncontr olling Intere s t 2,160 2,160 Other non- curre nt liabilities 1,347 1,347 Share h old e r s invest m e n t Common stock 513 72 72 513 Additional paid- in-capital 52,734 2,387 2,387 52,734 Retaine d earnings 55,818 13,417 13,417 55,818 Accumula t e d other compr e h e n sive income (loss) 2,508 (243) 2,265 Total shar e h olde r s invest m e n t 111,573 15,633 127,206 ©2009 Pearson Education, Inc. publishing as Prentice Hall
  15. 15. Chapter 1 1-15 50, 0 Total liabiliti e s an d sh ar e h o l d e r s inv e s t m e n t 20 1 , 1 9 3 37 , 3 4 9 50, 0 0 0 00 23 8 , 5 4 2 ©2009 Pearson Education, Inc. publishing as Prentice Hall

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