This Paper Is a Advance Accounting Solution Manual for Beams Book 12th Edition

Only available on StudyMode
  • Download(s) : 1696
  • Published : May 17, 2011
Open Document
Text Preview
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. APB Opinion No. 16 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.

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 shown in the balance sheet as a deferred credit.

SOLUTIONS TO EXERCISES

Solution E1-1

1a
2b
3a
4c
5d

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.

2c

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 $150,000

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 600,000

Total stockholders' equity$5,295,000

Entry to record combination:

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

Investment in Sleep-bank$ 10,000
Additional paid-in capital 5,000
Cash$ 15,000

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

Solution E1-4

Journal entries on IceAgeGinny's books to record the purchase

Investment in JHester$2,5450,000
Common stock, $10 par$1,0200,000
Additional paid-in capital 1,3450,000

To record issuance of...
tracking img