Advanced accounting Ch 1 solution

Topics: Generally Accepted Accounting Principles, Balance sheet, Asset Pages: 35 (1842 words) Published: October 19, 2013
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. 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.

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 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.

5A 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.

SOLUTIONS TO EXERCISES

Solution E1-1

1a
2b
3a
4d

Solution E1-2 [AICPA adapted]

1a
Plant and equipment should be recorded at the $220,000 fair value.

2c

Investment cost

$1,600,000

Less: Fair value of net assets

Cash
$ 160,000

Inventory
380,000

Property and equipment — net
1,120,000

Liabilities
(360,000)
1,300,000

Goodwill

$ 300,000

Solution E1-3

Stockholders’ equity — Pal Corporation on January 2

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]
1,180,000
Total stockholders’ equity
$10,570,000

Entry to record combination

Investment in Sip

6,000,000

Capital stock, $10 par

3,000,000
Other paid-in capital

3,000,000

Investment expense

20,000

Other paid-in capital

10,000

Cash

30,000

Check: Net assets per books(book value)
$ 7,600,000

Goodwill and write-up assets
3,000,000

Less: Expense of direct costs
(20,000)

Less: Issuance of stock
(10,000)

$10,570,000

Solution E1-4

Journal entries on Pan’s books to record the acquisition

Investment in Set
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 Set in a business combination....
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