Chapter 1 BUSINESS COMBINATIONS

Answers to Questions 1 A business combination is a union of business entities in which two or more previously separate an in epen ent companies are brou!ht un er the control of a sin!le mana!ement team" FASB Statement No. 141R escribes three situations that establish the control necessary for a business combination# namely# when one or more corporations become subsi iaries# when one company transfers its net assets to another# an when each combinin! company transfers its net assets to a newly forme corporation" The issolution of all but one of the separate le!al entities is not necessary for a business combination" An e$ample of one form of business combination in which the separate le!al entities are not issolve is when one corporation becomes a subsi iary of another" In the case of a parent%subsi iary relationship# each combinin! company continues to e$ist as a separate le!al entity even thou!h both companies are un er the control of a sin!le mana!ement team" A business combination occurs when two or more previously separate an in epen ent companies are brou!ht un er the control of a sin!le mana!ement team" Mer!er an consoli ation in a !eneric sense are fre&uently use 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 combinin! entities are issolve an a consolidation is a type of business combination in which a new corporation is forme to ta'e over the assets of two or more previously separate companies an all of the combinin! companies are issolve " (oo will arises in a business combination accounte for un er the ac&uisition metho when the cost of the investment )fair value of the consi eration transferre * e$cee s the fair value of i entifiable net assets ac&uire " Un er FASB Statement No. 142 # !oo will is no lon!er amorti+e for financial reportin! purposes an will have no effect on net income# unless the !oo will is eeme to be impaire " If !oo will is impaire # a loss will be reocni+e " A bar!ain purchase occurs when the ac&uisition price is less than the fair value of the i entifiable net assets ac&uire " The ac&uirer recor s the !ain from a bar!ain purchase amount as an e$traor inary !ain urin! the perio of the ac&uisition# un er FASB Statement No. 141R "

,-../ 0earson E ucation# Inc" publishin! as 0rentice 1all 2%2

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 2 a Plant and equipment should be recorded at the $55,000 fair value. c Investment cost !ess" #air value of net assets Cash Inventor$ Propert$ and equipment 3 net !iabilities *ood+ill Solution E1-3 Stockholders equity Pillow Corporation on January 3 Capital stoc,, $%0 par, -00,000 shares outstandin. Additional paid/in capital [$000,000 1 $%,500,000 2 $5,000] 3etained earnin.s 4otal stoc,holders5 equit$ Entry to record combination Investment in 6leep/ban, Capital stoc,, $%0 par Additional paid/in capital Investment e7pense Additional paid/in capital Cash Chec," 8et assets per boo,s *ood+ill !ess" 97pense of direct costs !ess" Issuance of stoc, $-, 00,000 %,5%0,000 (%0,000) (5,000) $5,0&5,000 -,000,000 %,500,000 %,500,000 %0,000 5,000 %5,000 $-,000,000 %,'&5,000 '00,000 $5,0&5,000 $ 0,000 %&0,000 5'0,000 (% 0,000) $ 00,000

'50,000 $%50,000

:000& Pearson 9ducation, Inc. publishin. as Prentice ;all

Chapter 1

1-3

:000& Pearson 9ducation, Inc. publishin. as Prentice ;all

1-4

Business Combinations

Solution E1-4 Journal entries on IceAges books to record the acquisition Investment in <ester 0,550,000 Common stoc,, $%0 par %,000,000 Additional paid/in capital %,-50,000 4o record issuance of %00,000 shares of $%0 par common stoc, +ith a fair value of $0,550,000 for the common stoc, of <ester in a business combination. Additional paid/in capital %5,000 Investment e7penses =5,000 >ther assets '0,000 4o record costs of re.isterin. and issuin. securities as a reduction of paid/ in capital, and record direct and indirect costs of combination as e7penses. Current assets %,%00,000 Plant assets 0,000,000 !iabilities -00,000 Investment in <ester -,000,000 4o record allocation of the $0,550,000 cost of <ester Compan$ to identifiable assets and liabilities accordin. to their fair values, computed as follo+s" Cost $0,550,000 #air value acquired -,000,000 ?ar.ain purchase amount $ =50,000 Investment in <ester *ain from bar.ain purchase 4o record .ain from bar.ain purchase. =50,000 =50,000

:000& Pearson 9ducation, Inc. publishin. as Prentice ;all

Chapter 1

1-5

Solution E1-5 Journal entries on the books o "arrison Corporation !anders Corporation to record merger with

Investment in ;arrison 5-0,000 Common stoc,, $%0 par % 0,000 Additional paid/in capital %50,000 Cash 000,000 4o record issuance of % ,000 common shares and pa$ment of cash in the acquisition of ;arrison Corporation in a mer.er. Investment e7penses @0,000 Additional paid/in capital -0,000 Cash %00,000 4o record costs of re.isterin. and issuin. securities and additional direct costs of combination. Cash =0,000 Inventories %00,000 >ther current assets 00,000 0 0,000 Plant assets 3 net *ood+ill %'0,000 Current liabilities -0,000 >ther liabilities =0,000 Investment in ;arrison 5-0,000 4o record allocation of cost to assets received and liabilities assumed on the basis of their fair values and to .ood+ill computed as follo+s" Cost of investment #air value of assets acquired *ood+ill $5-0,000 -@0,000 $%'0,000

:000& Pearson 9ducation, Inc. publishin. as Prentice ;all

1-6

Business Combinations

SOLUTIONS TO PROBLEMS Solution P1-1 Preliminary computations #air Aalue" Cost of investment in 6ain at <anuar$ 0 (-0,000 shares $00) ?oo, value 97cess fair value over boo, value 97cess allocated to" Current assets 3emainder to .ood+ill 97cess fair value over boo, value 8ote" $05,000 direct costs of combination are e7pensed. 4he e7cess fair value of Pine5s buildin.s is not considered.

$'00,000 (==0,000) $%'0,000 $ =0,000 %00,000 $%'0,000

Pine Corporation ?alance 6heet at <anuar$ 0, 000& Assets Current assets ($%-0,000 1 $'0,000 1 $=0,000 e7cess / $=0,000 direct costs) !and ($50,000 1 $%00,000) ?uildin.s 3 net ($-00,000 1 $%00,000) 9quipment 3 net ($000,000 1 $0=0,000) *ood+ill 4otal assets #iabilities and Stockholders Equity Current liabilities ($50,000 1 $'0,000) Common stoc,, $%0 par ($500,000 1 $-00,000) Additional paid/in capital [$50,000 1 ($%0 -0,000 shares) B $%5,000 costs of issuin. and re.isterin. securities] 3etained earnin.s (subtract $05,000 e7pensed direct cost) 4otal liabilities and stoc,holders5 equit$ $ %%0,000 00,000 --5,000 @5,000 $%,-00,000 $ %&0,000 %50,000 =00,000 ='0,000 %00,000 $%,-00,000

:000& Pearson 9ducation, Inc. publishin. as Prentice ;all

Chapter 1

1-7

Solution P1-2 Preliminary computations #air Aalue" Cost of acquirin. 6eabird #air value of assets acquired and liabilities assumed *ood+ill from acquisition of 6eabird $ 05,000 '@0,000 $%55,000

Peli an Corporation ?alance 6heet at <anuar$ 0, 000& Assets Current assets Cash [$%50,000 1 $-0,000 / $%=0,000 e7penses paid] Accounts receivable 3 net [$0-0,000 1 $=0,000 fair value] Inventories [$500,000 1 $%00,000 fair value] Plant assets !and [$=00,000 1 $%50,000 fair value] ?uildin.s 3 net [$%,000,000 1 $-00,000 fair value] 9quipment 3 net [$500,000 1 $050,000 fair value] *ood+ill 4otal assets #iabilities and Stockholders Equity #iabilities Accounts pa$able [$-00,000 1 $=0,000] 8ote pa$able [$'00,000 1 $% 0,000 fair value] Stockholders equity Capital stoc,, $%0 par [$ 00,000 1 (--,000 shares $%0)] >ther paid/in capital [$'00,000 / $=0,000 1 ($ 05,000 / $--0,000)] 3etained earnin.s (subtract $%00,000 e7pensed direct costs) 4otal liabilities and stoc,holders5 equit$ %,%-0,000 %,055,000 =00,000 $-,@05,000 $ -=0,000 @ 0,000 550,000 %,-00,000 @50,000 %55,000 $-,@05,000 $ =0,000 0@0,000 '=0,000

:000& Pearson 9ducation, Inc. publishin. as Prentice ;all

1-8

Business Combinations

Solution P1-3 Persis issues $%&''' shares o 1a stock or Sinecos outstanding shares

Investment in 6ineco @50,000 Capital stoc,, $%0 par 050,000 >ther paid/in capital 500,000 4o record issuance of 05,000, $%0 par shares +ith a mar,et price of $-0 per share in a business combination +ith 6ineco. Investment e7penses -0,000 >ther paid/in capital 00,000 Cash 50,000 4o record costs of combination in a business combination +ith 6ineco. Cash %0,000 Inventories '0,000 >ther current assets %00,000 !and %00,000 -50,000 Plant and equipment 3 net *ood+ill % 0,000 !iabilities 50,000 Investment in 6ineco @50,000 4o record allocation of investment cost to identifiable assets and liabilities accordin. to their fair values and the remainder to .ood+ill. *ood+ill is computed" $@50,000 cost / $5@0,000 fair value of net assets acquired.

1!

Per"i" Corporation ?alance 6heet <anuar$ 0, 000& (after business combination) Assets Cash [$@0,000 1 $%0,000] Inventories [$50,000 1 $'0,000] >ther current assets [$%00,000 1 $%00,000] !and [$ 0,000 1 $%00,000] Plant and equipment 3 net [$'50,000 1 $-50,000] *ood+ill 4otal assets $ 0,000 %%0,000 000,000 % 0,000 %,000,000 %'0,000 $%,@50,000

#iabilities and Stockholders Equity !iabilities [$000,000 1 $50,000] $ 050,000 Capital stoc,, $%0 par [$500,000 1 $050,000] @50,000 >ther paid/in capital [$000,000 1 $500,000 / $00,000] ' 0,000 3etained earnin.s (subtract $-0,000 direct costs) @0,000 4otal liabilities and stoc,holders5 equit$ $%,@50,000

:000& Pearson 9ducation, Inc. publishin. as Prentice ;all

Chapter 1

1-9

Solution P1-3 (continued) Persis issues (%&''' shares o 2a stock or Sinecos outstanding shares

=50,000 Investment in 6ineco (%5,000 shares $-0) Capital stoc,, $%0 par %50,000 >ther paid/in capital -00,000 4o record issuance of %5,000, $%0 par common shares +ith a mar,et price of $-0 per share. Investment e7pense -0,000 >ther paid/in capital 00,000 Cash 50,000 4o record costs of combination in the acquisition of 6ineco. Cash %0,000 Inventories '0,000 >ther current assets %00,000 !and %00,000 -50,000 Plant and equipment 3 net !iabilities 50,000 Investment in 6ineco 5@0,000 4o record 6ineco5s net assets at fair values. Investment in 6ineco %00,000 *ain on bar.ain purchase %00,000 4o record .ain on bar.ain purchase and adCust Investment in 6ineco to reflect total fair value. #air value of net assets acquired Investment cost (#air value of consideration) *ain on ?ar.ain Purchase $5@0,000 =50,000 $%00,000

2!

Per"i" Corporation ?alance 6heet <anuar$ 0, 000& (after business combination) Assets Cash [$@0,000 1 $%0,000] Inventories [$50,000 1 $'0,000] >ther current assets [$%00,000 1 $%00,000] !and [$ 0,000 1 $%00,000] Plant and equipment 3 net [$'50,000 1 $-50,000] 4otal assets $ 0,000 %%0,000 000,000 % 0,000 %,000,000 $%,5@0,000

#iabilities and stockholders equity !iabilities [$000,000 1 $50,000] $ 050,000 Capital stoc,, $%0 par [$500,000 1 $%50,000] '50,000 >ther paid/in capital [$000,000 1 $-00,000 / $00,000] = 0,000 3etained earnin.s (subtract $-0,000 direct costs %&0,000 and add $%00,000 *ain from bar.ain purchase) 4otal liabilities and stoc,holders5 equit$ $%,5@0,000

:000& Pearson 9ducation, Inc. publishin. as Prentice ;all

1-10

Business Combinations

Solution P1-4 1 Schedule to allocate in)estment cost to assets and liabilities Investment cost (fair value), <anuar$ % #air value acquired from 6en ($-'0,000 %00D) 97cess fair value over cost (bar.ain purchase .ain) Allocation" Cash 3eceivables 3 net Inventories !and ?uildin.s 3 net 9quipment 3 net Accounts pa$able >ther liabilities *ain on bar.ain purchase 4otals Allocation %0,000 00,000 -0,000 %00,000 %50,000 %50,000 (-0,000) (@0,000) ('0,000) $ -00,000 $ $-00,000 -'0,000 $ '0,000

Assets Cash 3eceivables 3 net Inventories !and ?uildin.s 3 net 9quipment 3 net $

P#ule Corporation ?alance 6heet at <anuar$ %, 000& (after combination) #iabilities 05,000 '0,000 %50,000 %=5,000 -50,000 --0,000 Accounts pa$able 8ote pa$able (5 $ears) >ther liabilities !iabilities Stockholders Equity Capital stoc,, $%0 par >ther paid/in capital 3etained earnin.sE 6toc,holders5 equit$ 4otal equities -00,000 %00,000 %@0,000 5%0,000 $%,0'0,000 $ %00,000 000,000 %@0,000 =&0,000

4otal assets $%,0'0,000

E 3etained earnin.s reflects the $'0,000 .ain on the bar.ain purchase.

:000& Pearson 9ducation, Inc. publishin. as Prentice ;all

Chapter 1

1-11

Solution P1-5 1 Journal entries to record the acquisition o !awn Corporation

Investment in Fa+n 0,500,000 Capital stoc,, $%0 par %,000,000 >ther paid/in capital %,000,000 Cash 500,000 4o record acquisition of Fa+n for %00,000 shares of common stoc, and $500,000 cash. Investment e7pense %00,000 >ther paid/in capital 50,000 Cash %50,000 4o record pa$ment of costs to re.ister and issue the shares of stoc, ($50,000) and other costs of combination ($%00,000). Cash 0=0,000 Accounts receivable -'0,000 8otes receivable -00,000 Inventories 500,000 >ther current assets 000,000 !and 000,000 ?uildin.s %,000,000 9quipment '00,000 Accounts pa$able -00,000 Gort.a.e pa$able, %0D '00,000 Investment in Fa+n 0,@00,000 4o record the net assets of Fa+n at fair value. Investment in Fa+n 000,000 *ain on bar.ain purchase 000,000 4o adCust Investment account to total fair value and reco.niHe the .ain from the bar.ain purchase. *ain on +argain Purchase Calculation Acquisition price #air value of net assets acquired *ain on bar.ain purchase $0,500,000 0,@00,000 $ 000,000

:000& Pearson 9ducation, Inc. publishin. as Prentice ;all

1-12

Business Combinations

Solution P1-5 (continued) 2 Celi"tia Corporation ?alance 6heet at <anuar$ 0, 000& (after business combination) Assets Current Assets Cash Accounts receivable 3 net 8otes receivable 3 net Inventories >ther current assets Plant Assets !and ?uildin.s 3 net 9quipment 3 net 4otal assets #iabilities and Stockholders Equity !iabilities Accounts pa$able Gort.a.e pa$able, %0D $ %,-00,000 5,'00,000

$ 0,5&0,000 %,''0,000 %, 00,000 -,000,000 &00,000 $ 0,000,000 %0,000,000 %0,'00,000

$ &,&50,000

0-,000,000 $-0,&50,000

$ ',&00,000

6toc,holders5 9quit$ Capital stoc,, $%0 par $%%,000,000 >ther paid/in capital ,&50,000 3etained earnin.sE ',000,000 4otal liabilities and stoc,holders5 equit$

0',050,000 $-0,&50,000

E 6ubtract $%00,000 direct combination costs and add $000,000 .ain on bar.ain purchase.

:000& Pearson 9ducation, Inc. publishin. as Prentice ;all

Chapter 1

1-13

3969A3C; CA69 (, Journal entry to record the acquisition -in millions o ./

Investment in 4ar.et 50,000 Common stoc,, $0.%0 par %00 Additional paid/in capital =&,&00 4o record acquisition of 4ar.et for % billion shares of common stoc, havin. a fair value of $50 per share. Cash 0=0,000 Accounts receivable -'0,000 8otes receivable -00,000 Inventories 500,000 >ther current assets 000,000 !and %&0,000 ?uildin.s %,%=0,000 9quipment 5@0,000 Accounts pa$able -00,000 Gort.a.e pa$able, %0D '00,000 Investment in 4ar.et 0,'00,000 Assi.n the e7cess of fair value over boo, value of assets and liabilities as sho+n in the follo+in. allocation schedule" Acquisition price $50,000 97cess fair value of assets acquired Inventor$ (%0D) '05 !and (00D) & @ ?uildin.s and improvements (00D) -,000 #i7tures and equipment (00D) @%% Computer hard+are and soft+are (00D) =0%, 5& *ood+ill $ 0 ,%=%

:000& Pearson 9ducation, Inc. publishin. as Prentice ;all

1-14

Business Combinations

$, Consolidated +alance Sheet at January 3(& $''0

(millions, except footnotes) Assets Cash and cash equivalents Accounts receivable, net $nventor% 'ther current assets (otal current assets )ropert% and equipment *and +uildin,s and improvements -ixtures and equipment Computer hard.are and soft.are Construction/in/pro,ress (ransportation equipment Accumulated depreciation )ropert% and equipment, net )ropert% 0nder Capital *ease *ess1 Accumulated amorti2ation )ropert% 0nder *ease / net 3ood.ill $nvestment in (ar,et 'ther non/current assets Total assets 1,#66 ( !,!"8) 8&,3#" &,3# ( ,3! ) 3,"&" 13,7&# &",""" ,!"6 201,193 1, 1 37,349 8,1! 1 (6,#&") 1,!31 18,61 6!,"& &,168 !,#3! 16,11" 3,&&3 ,188 1,&#6 #87 3, 711 !38 !,&33 83,38! #,!3 ,6 6 1,&#6 1,#66 (31,3&8) 1"6,8 1 &,3# ( ,3! ) 3,"&" &","" " !1,#"" " 3,618 238, 42 7,373 ,8!" 33,68& ,6#" !6,&88 813 6,1#! 6, &! 1,!!& 1!,7"6 6 & 8,186 #,"3! !",&6! !,13& 61, #! WALMART TARGET DR CR CONSOL I-DATED

L!a"!l!t!es a#$ s%a&e%ol$e&s' !#(est)e#t Commercial )aper Accounts pa%able Accrued and other current liabilities $ncome taxes pa%able Current portion of lon,/term debt and notes pa%able Current obli,ations capital leases (otal current liabilities *on,/term debt *on, term capital leases 4eferred income taxes 5oncontrollin, $nterest 'ther non/current liabilities 6hareholders7 investment Common stoc8 Additional paid/in/capital 9etained earnin,s Accumulated other comprehensive income (loss) (otal shareholders7 investment &13 & ,73! &&,818 ,&"8 111,&73 7 ,387 13,!17 ( !3) 1&,633 7 ,387 13,!17 &13 & ,73! &&,818 , 6& 1 7, "6 ,&7" 8,"#" 1!,67& 7"6 &,! 8 8& &1,7&! 7, 3,&13 !,#71 ,16" 1,3!7 &77 11,117 8,67& 6,&7& ,7&8 ! 1,36 ,&7" 3!,66& 17,!33 1,1 8 6,7#" 8& 6 ,871 3&,8#7 3,&13 &,&!8 ,16" 1,3!7

:000& Pearson 9ducation, Inc. publishin. as Prentice ;all

Chapter 1
Total l!a"!l!t!es a#$ s%a&e%ol$e&s' !#(est)e#t 201,193 37,349 0,000 0,0 00 238, 42

1-15

:000& Pearson 9ducation, Inc. publishin. as Prentice ;all