CHAPTER 1

UNDERSTANDING THE ISSUES
a gain on the sale of business of $500,000
($900,000 – $400,000).

1. (a) Product extension—manufacturer expands product lines in boating industry.
(b) Vertical forward—manufacturer buys
distribution outlets
(c) Conglomerate—unrelated businesses
(d) Vertical backward—manufacturer acquires a supplier
(e) Vertical forward—an entertainment
company acquires outlets for its products
(f) Market extension—companies providing the same services expand their
geographic market

6. (a) Value Analysis:
Price paid ............................... $800,000
Fair value of net assets .......... 520,000
Goodwill.................................. $280,000
Current assets (fair value)...... $120,000
Land (fair value) ..................... 80,000
Building and equipment
(fair value) ............................ 400,000
Customer list (fair value) ........ 20,000
Liabilities (fair value) .............. (100,000)
Goodwill.................................. 280,000
Total ....................................... $800,000

2. By accepting cash in exchange for the net
assets of the company, the seller would
have to recognize an immediate taxable
gain. However, if the seller were to accept
common stock of another corporation instead, the seller could construct the transaction as a tax-free reorganization. The
seller could then account for the transaction
as a tax-free exchange. The seller would
not pay taxes until the shares received
were sold.
3. Identifiable assets (fair value) ..
Deferred tax liability
($200,000 × 40%)..................
Net assets ................................
Goodwill
Price paid .................................
Net assets ................................
Goodwill ...................................

(b) Value Analysis:
Price paid ............................... $450,000
Fair value of net assets .......... 520,000
Gain........................................ $ (70,000)
Current assets (fair value)...... $120,000
Land (fair value) ..................... 80,000
Building and equipment
(fair value) ............................ 400,000
Customer list (fair value) ........ 20,000
Liabilities (fair value) .............. (100,000)
Gain........................................ (70,000)
Total ....................................... $450,000

$600,000
(80,000)
$520,000

7. The 2011 financial statements would be
revised as they are included in the
2012–2011 comparative statements. The
2012 statements would be based on the
new values. The adjustments would be:

$850,000
(520,000)
$330,000

(a) The equipment and building will be restated at $180,000 and $550,000 on
the comparative 2011 and 2012 balance sheets.
(b) Originally, depreciation on the equipment is $40,000 ($200,000/5) per year.
It will be recalculated as $36,000
($180,000/5) per year. The adjustment
for 2011 is for a half year. 2011 depreciation expense and accumulated depreciation will be restated at $18,000
instead of $20,000 for the half year.
Depreciation expense for 2012 will be
$36,000.

4. (a) The net assets and goodwill will be recorded at their full fair value on the
books of the parent on the date of acquisition.
(b) An investment account is recorded at
the price paid for the interest.
5. Puncho will record the net assets at their
fair value of $800,000 on its books. Also,
Puncho will record goodwill of $100,000
($900,000 – $800,000) resulting from the
excess of the price paid over the fair value.
Semos will record the removal of its net assets at their book values. Semos will record

1

(c) Originally, depreciation on the building
is $25,000 ($500,000/20) per year.
It will be recalculated as $27,500
($550,000/20) per year. The adjustment for 2011 is for a half year. 2011
depreciation expense and accumulated
depreciation will be restated at $13,750
instead of $12,500 for the half year.
Depreciation expense for 2012 will be
$27,500.
(d) Goodwill is reduced $30,000 on the
comparative 2011 and 2012 balance
sheets.

(c) This agreement is also settled by issuing shares. The price is not changed.
The paid-in capital in excess of par account is reduced for the par value of
the additional shares to be issued. The
fair value of the stock originally issued
is being devalued.
The entry would take the following
form:
Paid-In Capital in
Excess of Par............ 5,000
Common Stock
($1 par) ............
5,000

8. Fair value of operating unit ...... $1,200,000
Book value including goodwill .. 1,250,000
Goodwill is impaired.

10. The two major differences are:
(a) Goodwill is $100,000. Under U.S.
GAAP it would be impairment tested
and possibly reduced in future periods.
Under IFRS, it would be amortized over
some number of future periods.
(b) Under U.S. GAAP, the stock issue
costs would reduce the amount credited to paid in capital. Under IFRS, the
issue costs would be expensed in the
period incurred.

Fair value of operating unit ...... $1,200,000
Fair value of net identifiable
assets (excluding goodwill) ... 1,120,000
Recalculated goodwill .............. $ 80,000
Existing goodwill ......................
200,000
Goodwill impairment loss ......... $ 120,000
9. (a) An estimated liability should have been
recorded on the purchase date. Any difference between that estimate and the
$100,000 paid would be recorded as a
gain or loss on the liability already recorded.
(b) Even though the issuance is based on
performance and suggests additional
goodwill, no adjustment is made if additional stock is issued. In this case, the
paid-in capital in excess of par account
is reduced for the par value of the additional shares to be issued. The fair value of the stock originally issued is being devalued.
The entry would take the following
form:
Paid-In Capital in
Excess of Par............ 10,000
Common Stock
($1 par).............
10,000

2

Ch. 1—Exercises

EXERCISES
EXERCISE 1-1
(1) Current Assets..........................................................................
Land..........................................................................................
Building.....................................................................................
Equipment ................................................................................
Goodwill....................................................................................
Liabilities ..............................................................................
Cash.....................................................................................

100,000
90,000
300,000
275,000
187,000

Expenses (acquisition costs) ....................................................
Cash.....................................................................................

15,000

(2) Cash .........................................................................................
Liabilities...................................................................................
Accumulated Depreciation—Building .......................................
Accumulated Depreciation—Equipment ...................................
Current Assets .....................................................................
Land .....................................................................................
Building ................................................................................
Equipment ............................................................................
Gain on Sale of Business.....................................................

850,000
100,000
200,000
100,000

102,000
850,000
15,000

80,000
50,000
450,000
300,000
370,000

Note: Seller does not receive the acquisition costs.
(3) Investment in Crowley Company ..............................................
Cash ...................................................................................
Expenses (acquisition costs) ....................................................
Cash ...................................................................................

850,000
850,000
15,000
15,000

Note: At year-end, Crowley would be consolidated with Barton, as explained in Chapter 2.

3

.....000 shares × $20).............000 300............... Excess of total cost over fair value of net assets (goodwill).................................000 180...........000 640...............................................................................................200.................Ch...................................................000 $100.............000 550................000 $1..................................................................000 250.....................................000 Acquisition Expense...........000 180......... Equipment ............................................................. Less fair value of net assets acquired: Cash........................ Buildings ....000 220.... Common Stock.................... Buildings............................................................................................................... 100................................. Bonds Payable .......................................... Discount on Bonds Payable........ Inventory ...... Cash......................................................................... 4 80...........000 10...000 $ 640......... Current Liabilities ..............................................000 250............. 25.................................................................................................................. Land .............. Inventory .................................................................... Bonds payable ..................000) 560.............................000 140...............000 300................................. Value of net identifiable assets acquired.........................................................................000 900...................................000 ................................000 (80............................. Paid-In Capital in Excess of Par ..... Land ................................................... Goodwill*.........................................000) (410. Equipment............. 1—Exercises EXERCISE 1-2 Cash............. Current liabilities..............................................................................................000 35.................................000 220......................................................... Paid-In Capital in Excess of Par........................000 300...............................................................................000 *Total consideration: Common stock (60..................

......................650 879... 5 .......... Less fair value of net assets acquired: Accounts receivable ............................................ Customer list ($100............................................. Customer List................000 210................ Warranty Liability..000 1................................... Excess of total cost over fair value of net assets (goodwill).................................................................................................................. Current Liabilities ........000 210.............000 less 10%) ..........900.................000 180................... Estimated liability under warranty ........................000 shares × $20).................................................000 200. Inventory ......................................................000 40....... Inventory .............................000 90......120.......................................... Goodwill*................000................................................000 210................................................... Bonds payable ...........................................................000) (40...........................000 2..000 450............................................... Common Stock..... Land ..............................................000 210........648 using financial calculator or Excel........................................................................000 $ 100.................. 100..........000 180......000 $2...........350 *This amount is arrived at using table and would be 210................ 2.650* (80.................................000) (200.............................................................................................. Land ......000 90.... Bonds Payable ...............................................................................................000 100..................................000) 1...000 200........................... Paid-In Capital in Excess of Par...........000 payment discounted 3 years at 20%) Current liabilities............. 80...... 1—Exercises EXERCISE 1-3 Accounts Receivable ........................................350 Totals ..............000 450............................000 200........ Building ...... R&D project.........................000 *Total consideration: Common stock (100................................Ch.......000 less 10%) ............................................................................ Value of net identifiable assets acquired ..................................320......... Equipment for resale ($200..650 $ 879........................................... Equipment for Resale ($200............... R&D Project ..................................................................320. Building .......................................................

.....................000 15.................................................................... Gain on Acquisition*...................................................000 15........................ Brand-Name Copyright ................................000 40........................... Equipment ... Mortgage payable ...................000 250......................................000 270..................................................................................000 40..........000 35............................. Current liabilities........................000 (80..............................................000) (250................................... Inventory ......................... 6 200.....................................000 $ 200..............000 $ (35.............. 1—Exercises EXERCISE 1-4 Accounts Receivable ............................................................................... Acquisition Expense.. Value of net identifiable assets acquired........ Cash...................................... Less fair value of net assets acquired: Accounts receivable ............000 25......... Mortgage Payable .............................................................. Current Liabilities ................................................ Brand-name copyright.......... *Total consideration: Cash.......................000) 195. Excess of total fair value over cost of net assets (gain)...000 25......................................................000 160.......000) .........................................................................................................................................................................................................000 $160............... Cash................................Ch.............................................000 80........................................000 270............... Inventory .............. Equipment ...........................

000 $2...... 2011 (revised) Sales revenue................... $70.................000 235........ Bonds payable......................000 1..000 $100...000 Retained Earnings (increase depreciation for half year)...................................795.....................................................................000 Adjustment for half year........................... Total liabilities and equity ... Depreciation based on provisional cost ($600.000 Summary Income Statement For Year Ended December 31.000 5......... Plant Assets (because they are shown net of depreciation)........................................ Depreciation expense ................. Net income.... Depreciation adjustment: Depreciation on final cost ($700......000 645.............................................. $5............................000 Total assets ......................000 600...000 ...000 85.............. $ 300..000 $150................. 2011 (revised) Current assets .................................000 $10.............000 5..000 $ 45....................... Common stock ($1 par) ....000 520................................. Provisional value of manufacturing plant .................................................................................... Cost of goods sold ..... Plant assets (net)............................ $ 300............ Paid-in capital in excess of par Retained earnings .......... Operating expenses............................ $2.............................. 1—Exercises EXERCISE 1-5 (1) Adjustments: Final value of manufacturing plant.................................... Goodwill ...... Equipment (net) ................ 7 $800......695......000 Journal Entries: Plant Assets..000 100.....000 600.000 $280...000 Current liabilities ..... Goodwill......................................................... Total increase ...........000 60..000/10 years) ....000 Balance Sheet December 31. (2) $700....................................................300.....000 500...... 100...........Ch...............................................................................000/10 years) Annual increase in depreciation............... Gross profit .000 1.......................795.....000 200........000 50.........................................................

..... Less fair value of net assets: Current assets..................................000 × 30%) = the value of the remaining carryforward .......................................000 accumulated depreciation $180...................... Goodwill = $800... Goodwill*........................................................000 270.........................800 In this tax-free exchange...... 8 100.....000 950................................................................................ Building ......................................... 1—Exercises EXERCISE 1-6 Machine = $200. Equipment............ Price paid ........... Current Liabilities ......................000) $ 350..........000 (60..000 $ 950...................... The additional tax to be paid as a result of Lewison’s inability to deduct the excess value assigned to the machine is $16.....000 net book value EXERCISE 1-7 Current Assets .... Excess .........800 ($56...........000 270.............................................................000 = $144.............. *Tax loss carryforward consideration: Deferred tax asset ($300................................... Deferred Tax Asset ....000 60.............. × 2 prior years = $36.. Equipment .........000 – $16............Ch................................................................................................................. Recorded (current) liabilities ...........................................000 (90....800) = $116................................................000 350....000 – ($700.........000 appraised value) – ($144...000 90...............................................................................................000 $ 440.......000* net book value)] of the machine’s value is not deductible on future tax returns.....................000 × 30%)...............000 200................. Cash.000/10 yrs..........000) 510.......................000 $100........................000 [($200................ depreciation on $56......................000 – $36.............000 ..........................000 200..........000 Deferred tax liability = $16..800 *$180...................................... Goodwill .............................................................................................. Building ..................

.......000 EXERCISE 1-9 (1) Purchase price...............................000 (2) Shares issued = $60................000 Goodwill is impaired................................000 50.............. $400.............000 340............................000 shares]................... 12................................... Common Stock ($1 par)................................000 Cash . Book value of Anton net assets..........000 200................000/$5 per share = 12....................000 $200................. Existing goodwill .... 9 $400..............000 The estimated value of the unit exceeds $600...... Estimated fair value of business units .............. Fair value of net assets other than goodwill ..........000 $500......................................................000) less $40........000* – $25....000 $140.... goodwill is not increased and cash is not changed.................................000 400................... excluding goodwill .......... Impairment loss ................................. Book value of Anton net assets... 60............................000 $ 60.............................. $520................. 50...000 12................................000 ..... 40........................000 + $60.000 (3) Paid-In Capital in Excess of Par ..................... $200..............................................................000 $450.........................................000 shares Since the contingency is settled in shares........................................... Added number of shares ................. including goodwill .......000 additional shares issued is as follows: Paid-In Capital in Excess of Par ....................000.000 Loss on Estimated Contingent Consideration...........................000 Deficiency [($6 – $4) × 100............Ch..................................................... Common Stock ($1 par)..........000)/2 = $55... Goodwill .....................000 2 × (average income of $55... The entry to record the 12....................................000 liability already recorded................ including goodwill . Divide by fair value ...................................................................................... Fair value of net assets......... *($50. (b) Estimated fair value of business unit .. $600........................... 1—Exercises EXERCISE 1-8 (1) Estimated Liability for Contingent Consideration...................... Remeasured amount of goodwill ............................................................ confirming goodwill....000 ÷ $4 50............................... (2) (a) Estimated fair value of business unit .......000 No impairment exists... 20..........................

.000 125...000 250.............................................................................................000 125.... The journal entry (not required) would be as follows: Accounts Receivable ............................................................................ Land ............................... Building ............000 $ 5............................................................. The correct present value factor is found in the “present value of an annuity of $1” table.............667 (c) Present value of a $5.......................000 130..............000 100................................................... Inventory .......000 300......... Equipment .......................000 100............... Total Liabilities .. Fair value of total assets.............000 $550........................................ 1—Exercises APPENDIX EXERCISE EXERCISE 1A-1 (1) Calculation of Earnings in Excess of Normal: Average operating income: 2011........................000)...........................Ch..........................................000 110.......000 ......................................................000 15.000 0.................. Industry normal rate of return .............................. 10 100................................................ 2014 (subtract $40... Cash .............372 (2) The goodwill recorded would be $15.000 $875...............................000 Goodwill (b) Capitalize the perpetual yearly earnings at 12%: Goodwill = Yearly Excess Earnings Capitalization Rate = $5.000 ÷ 5 years = $110.000 120......................................000 250.................................... Land.....000 690...................000 300.......................000 annuity capitalized at 16%... 2015.................... Goodwill .... This factor multiplied by the $5........................... Inventory............................................000 (a) 5 × $5......................................... at 16% for 5 periods.......... Equipment..............................000 = $25.......................... Building.................. $ 90................................................. Normal return on assets ...... 2013..........................................................000 yearly excess earnings will result in the present value: 3............. Expected annual earnings in excess of normal ..2743 × $5.000 = $16.....................000 × 12% 105.................... Less normal return on assets at fair value: Accounts receivable .......................000 100.000..............................12 = $41.............. 2012.....000 200..................000 $100...........................

.................................................... Inventory ................................................Ch.....000 100.. Other current assets......................... 1—Problems PROBLEMS PROBLEM 1-1 (1) Acquisition price $550.......... Check Totals $550...000 79... In-process R&D............................................................................................... Current liabilities........................................................ Less fair value of net assets acquired: Accounts receivable ...................................................................... Cash ...........000 550.....................................000 157......................... Bonds payable ...........................................................................000 Total consideration: Cash............000 55..............................000 11 795.....000 795............................................................000 (145.000 55..........................000 120.......000 30...000) (100.............000) 393................................................................................................................................ Current Liabilities.................................... Inventory ..... Trademark......... Excess of total cost over fair value of net assets (goodwill) .... Goodwill ............................................................................000 340........... Equipment .................................................................................................... R&D ..................................................000 14...... Value of net identifiable assets acquired..................................... Bonds Payable ...........................000 ................... Trademark.........000 $157.........000 145.......................................................................................000 $ 79..000 340....... = Cr....... Equipment ......................... Dr.....................000 30............... Other Current Assets .................. Journal Entry: Accounts Receivable...............000 120...000 14.............

...000 340..................................................000) 393........................................................ Other current assets... 1—Problems Problem 1-1................................ In-process R&D...000) 79.................................................................................. R&D .............................................................. Trademark........ Bonds payable .. Equipment .... Inventory ......................................................000 43............................000 30....................000 .........................000 (145.................. Other Current Assets ................000 100.........................................000 12 638............................. Check Totals $350............... Trademark...............................................000 120.........................................................000 145................... = Cr.... Concluded (2) Acquisition price $350...000 Total consideration: Cash................................................ Current liabilities.....................................000) (100...............................................000 638...... Excess of fair value of net assets over cost (gain) ...000 55.....................................000 14........000 120.................................. Gain on Business Acquisition........Ch..................000 $ (43........... Inventory ..........000 55....................000 30................000 $ 79..........................................000 350................................................. Cash .......................................................................... Journal Entry: Accounts Receivable........................................... Bonds Payable ...................................................................... Equipment ............................................000 14............................... Value of net identifiable assets acquired...... Less fair value of net assets acquired: Accounts receivable . Current Liabilities...... Dr.................................000 340......

..........Ch..............................000 160...................................................................000 5.................................... Current liabilities.................................................000 10............................000 900............................000 450...................................200............ Discount on Bonds Payable ................................... Check Totals $1.....000 200......000 (160............. 13 1...................000 $ 310........... Common Stock (30..........................................000 100................... Cash.................................................. Bar entry to record the purchase of Vicker: Accounts Receivable................ Paid-In Capital in Excess of Par................................. Dr................000 190. Buildings............... 1—Problems PROBLEM 1-2 Total consideration for Vicker: Common stock (30......................................................... Less fair value of net assets acquired: Accounts receivable ............................................460...................................................................000 1............ Buildings.................... Current Liabilities ..........................000 190..........000 ...000 shares × $40)......... Land ............................................000 5.............................000 300.......000 Acquisition Expense........... Excess of total cost over fair value of net assets (goodwill).................................................................. Inventory ........................ Inventory .............................................................000 450............................................ = Cr......... Goodwill ................000 310...............................000) 890........ Value of net identifiable assets acquired.............000 $ 200.... Bonds payable .....000 300..........000 300........................................000) (90..................460. Land .....................................................................000 shares × $10 par) .............................................................. Bonds Payable ..........................

........... Less fair value of net assets acquired: Accounts receivable ....... = Cr............................... Discount on Bonds Payable ..............000 100..........................................................000 4.............................................................. Check Totals $600... Value of net identifiable assets acquired............................................. 1—Problems Problem 1-2.....000 $ 80....... Concluded Total consideration for Kendal: Common stock (15....................000 150......................000 $ 90.. Buildings.......... Bonds payable ...................000 (55...................................................... Buildings............................. 15.......................000 Paid-In Capital in Excess of Par .. Paid-In Capital in Excess of Par............000 80... Bar entry to record the purchase of Kendal: Accounts Receivable....................... Excess of total cost over fair value of net assets (goodwill).................................000 shares × $40)............. Land .................... Inventory .......000 100.........000 14 755.........Ch............................................ Cash.............................................................000 450.................................................................................... Current liabilities................................ To record issue and acquisition costs...... Common Stock (15.............................................................................000) 510......000 55........................000 90.........................000 5.................000) (95....................000 400.............. Cash..................................... 4.....................................................................................000 755.....................000 Acquisition Expense...............000 80........................000 shares × $10 par) ...................................................................................................................... Land .................................................................000 ........................... Inventory .......................000 400. Bonds Payable ...........................000 15.....000 100................................................................................................ Dr...... Goodwill ..... Current Liabilities ...........................................000 80.......

.................................................. Current Liabilities........................................................000 20............................ Depreciation (1/20 of $400..............000) (25.................................................... 15 Combined Income $ 200.... 925.......................000 235...000 (2) Pro Forma Income: Sales............................................. Excess of total cost over fair value of net assets (goodwill) .................................... Accounts receivable ...... Cash.................. Depreciable Fixed Assets .............................................................................................................................................. = Cr........................................................000 100...................................................................000 20..000) (20.....................000 (140.......000 (30..................000 165.............................000 70..000 730...000) 495.......................................................... Other expenses ..................... Inventory ....000 120...............000 400...........................................................................................................000 additional for inventory valuation)............................ $730...................000 Acquisition Expense ............................................000 120...000 $235........... 1—Problems PROBLEM 1-3 (1) Total consideration for Yount: Cash.......................... Long-Term Liabilities ....................... Less: Cost of goods sold ($120..... Value of net identifiable assets acquired........................................................................................................................000 + $20............. Goodwill .................................... Less fair value of net assets acquired: Cash equivalents............ Accounts Receivable.............. Check Totals 30................000 $ 100.........000 ............... Inventory ....................000) (165................................................Ch........ Current liabilities......000 70.. Depreciable fixed assets ......................................000 400.........................000) $ 15........000 Dr.................................... Acquisition entry: Cash Equivalents ....000 market value).................... Cash .......................... Net income........................................................000 925........ Long-term liabilities .............

................000 35.. Accounts Payable......................... Kiln Corporation journal entries: Accounts Receivable.........000 $ (35.........000) 50.......... Land ...........................000 250......................... Land .000 540..............000 40........... Kiln Corporation journal entries: Accounts Receivable.......000 120..................................... Value of net identifiable assets acquired..................................................................... Building ......... Accounts Payable............. Land ........... Inventory ................... Dr.................................................................................................. Dr.....................................................................000 (40..................000) 420....................000 consideration Total consideration for Williams: Cash........................................................000 250..............Ch..............000 $ 50.....000 consideration Total consideration for Williams: Common stock (20.............................................000 16 460.................................000 540.............................. Check Totals $500...... Accounts payable.....................................000 40....................000 (40...............................................................................................................................................000 200.................... Check Totals $385.......................................000 120.........................000 (2) $385...........000 $ 80........................................ Excess of fair value of net assets over cost (gain) ......000 40......................... Accounts payable................................................................. 1—Problems PROBLEM 1-4 (1) $500............... Gain on Acquisition ...................................... = Cr................000 250............................................................................ Inventory ...................................000 40....000 shares × $25) ........ Less fair value of net assets acquired: Accounts receivable ..............000 $ 50................. Excess of total cost over fair value of net assets (goodwill) ... Inventory ......................................000 80........................................................................................... Goodwill ..................000 385.................................. = Cr..............000) 420. Less fair value of net assets acquired: Accounts receivable ......000 300.............................000 460.......... Cash .... Building .......... Building ..........000 .000 50................................... Value of net identifiable assets acquired........000 120............000 250........000 40............................................ Building .................................................... Inventory ..................000 40........................................................................................................................ Common Stock..............000 120........... Land .. Paid-In Capital in Excess of Par.........................................

.............3) ........ Prepaid Insurance ............................................. Paid-In Capital in Excess of Par [(18.................................. Land .....000 Dr............................................................................................000 18...........475............. Accounts Receivable.................................... Inventory .........................................................................................................000 × $270) – $180. Machinery and Equipment ......... Excess of total cost over fair value of net assets (goodwill)........ Prepaid insurance . = Cr............000 1.........915................................500 × 1.200.......... Cash......... 1—Problems PROBLEM 1-5 Total consideration for Jack: Common stock (18........000 180.....550 (1............... Machinery and equipment ($1..............000 Acquisition Expense.860........................ Current Liabilities ...............000 70.........000 1.................915......................475....................... Accounts receivable ......................................................335...................................... Land ...........................000 × $10) . Check Totals 6.....050 $1.......000] $4............................. Inventory ..000 12............................................................000 1.. Value of net identifiable assets acquired.............. Goodwill ...............................000) 3..................................680...200.000 70...............000 $ 400.950 400..................................473.... Journal Entry: Investments................................ Current liabilities......................805.950 1..................................................000 .........054......................................805............ Common Stock (18................335.........550 1.................................000 18............................Ch...... 12........000 17 6................000 4..............................................000 1...................500 925................500 925.............. Less fair value of net assets acquired: Investments.....................................000 shares × $270)...........................................

.......................... Other current assets....................................000 18 1................................................................ Other Current Assets ...................................000 72.....500 45............ Land .................000 15.................................................Ch........................................................................ Accounts payable............... Check Totals 1......000 580........................000) (156..000 20........................................................................051................................................... Payroll and Benefit-Related Liabilities—Current ............................ Payroll and benefit-related liabilities—Long-Term ........................................................................................................................... Building ..................000 55...............000 56... Accounts Receivable.000 426..........................................................................000 20........................................................................000) (248...................000 248..... Investments.....................................000 .................. Value of net identifiable assets acquired.........................................................................000 63............................................................000 275...........000 56....................................... Accounts receivable ............................................................... Long-term debt.....500 20.....000 15............. Trade Names ... Debt maturing in one year........................................... Payroll and benefit-related liabilities—Current ... 1—Problems PROBLEM 1-6 Total consideration for Sylvester: Cash............................ Building ...............................................000 $ 24....................................................................500 $ 72....051.............000 Dr.................. Cash............................................000 63..............000 15................................................ Payroll and Benefit-Related Liabilities—Long-Term ........................ Land ............ Equipment ............................ Patents ........................................................................................................................................................ Excess of total cost over fair value of net assets (goodwill).............000 55.......................................................................................................500 Acquisition Expense....... Equipment ..............000 15.. Journal Entry: Notes Receivable ................ $580.......000 426...............000 30....................... Long-Term Debt .................. Trade names ............................ Debt Maturing in One Year ............................................................................... Patents ...........................................................000 (45....................................500 24........... = Cr...... Accounts Payable ......000 12................. Inventory .................................. Goodwill ......... Investments............ 20.....500 10............. Cash....................................................................000 30................000 156....500) (10................. Less fair value of net assets acquired: Notes receivable ......................................................................................................................................000) 507................................000 275.................000) (12.. Inventory ...................

....................................................... Equipment .........000 170........ Vehicles......... Excess of total cost over fair value of net assets (goodwill) .................................................................................................................................................. Check Totals $200........................ Prepaid Expenses .................................000 170.................... Bonds payable ...........000) 487......000 30....................................... Equipment ..........................................000 15........ Taxes Payable............................... Paid-In Capital in Excess of Par............................................................ Estimated Contingent Liability .................................................................. Interest Payable ........... Journal Entry: Notes Receivable .................................. Discount on Bonds Payable .................................................................. Franchise .......................................000 25................. Inventory ... Common Stock (15............................000 80.....000 300.............................000 200.................Ch........................................ Accounts payable.....000 90................500 $ 33.................. Land ................................................................. Interest payable........................................................000 50..............................000 250............ Prepaid expenses .....................000 270...........500 63....................... Land ..... Buildings...................... Bonds Payable .....500 19 868.................................................. Investments................................................................................. Accounts Payable............ 1—Problems PROBLEM 1-7 (1) Total consideration for Smith: Cash........................000) (220...................................000 250.............................. Value of net identifiable assets acquired...........500 33.....................000 25..................................000 shares × $2) ..............................500 868............................000 15... Cash ....................... Contingent liability ($50.......000) (3.................................................................................................. = Cr.................000 55............. Dr..........000 55......000 250...................................................................................000 37................... Taxes payable.....000 shares × $20).............. Goodwill ....... Stock issued (15......... Franchise ................................000 70............000 37..................... Inventory ........................ Vehicles................000 30..................................................................................................................................................000 3............................................ Investments.......................................................................................... Less fair value of net assets acquired: Notes receivable ....................................... Total consideration .000 × 75%) ......................................000 $ 50...000 15.........000) (15..000 (63......................................000 90..... Buildings...................................500 .............................................000 70............000 80................................................500 $537....

...................... Accrued Liabilities ................000 10..................000 30................................................................. Inventory ..............................................000 $ (18............................. Check Totals $150.. Accounts Payable ..................... 7.............. $45......000 30............................................................................ Equipment .....................................................................000 80............000 ....................000 8.......... Other Current Assets ...............000 50.........................................................................000 × 90%) .................000 56................ Other current assets................ Notes payable .....000 $ 90.........500 7.......................000 150....... 1—Problems Problem 1-7............. = Cr............................................................000 80................................................... Cash..............................000 14........ Accounts payable......................000 (56..................000 37...000 18............................................ Gain on Acquisition of Business............................ Vehicles.......................................................................................................000 30...................................................... Value of net identifiable assets acquired... Journal Entry: Accounts Receivable....................................................000) (14.000 × 75%) ................... Inventory ................................... Estimated Contingent Liability .............................. Concluded (2) Revised estimate of contingent payment ($50................. Dr.... Equipment ...................000) 90..... Vehicles..........................................................................................................................................500 $ 7..................... Mailing list .........................................000 268.................................. Accrued liabilities ............Ch....... Notes Payable...................500 PROBLEM 1-8 Total consideration for Heinrich: Cash.............................000) (30................. Less fair value of net assets acquired: Accounts receivable .................... Excess of fair value of net assets over price paid (gain)............000) 168............... Net increase....................................................................... Mailing List .........................................................................................................................000 10............000 50.. Original estimate ($50.......000 8.................................500 Journal Entry: Loss on Estimated Contingent Liability ....000 20 268..........

........................................000 172................................. Net income.......000 $ 62................................................................................................................................. Amortization expense .......................500 20.... Depreciation expense .................................. Other income and expenses.......................000 $397.....550 10............................................................350 9..... 1—Problems PROBLEM 1-9 (1) Reported Income for 2011 Combined Income Statement For the Period Ending December 31.......000 $140......705 $ 43..................... Provision for income taxes...................................645 ......................................................600 343...Ch..350 18...................... Administrative expenses............... Selling expense .. 21 $620.................................................................................................. Income from operations ...............650 $ 53. Gross profit .................000 223.......... 2011 Sales revenue............................................................................. Cost of goods sold ...................................... Income before taxes .......................

...... Ann’s Enterprises Tool Co... .....................................750 3.... 223...............000) 140.........600 ... Nonoperating Revenues and Expenses: Interest Expense..... Provision for Income Taxes (30%)..... ............. (1/2($18.000 . .............. ........... 2011 (Tax rate expressed as 0.... Total Nonoperating Revenues and Expenses .............................. Operating Income ........ 2............ 5.. (3) New amortization: Patent...... ............... Income Before Taxes ..... 3. (7.. (1) 2.............. (750) 225 (525) .............000/6 years) Computer software....... .... ...Ch...........000 ...800 .....000/10 years) Total new amortization.600) 19...........500 750 6......... 13........ 1/2($125.........000) (4.....750 5....................000 Combined Income Statement . ........................ ...... ½($10........................................... 4................................000 .500 3................................... Continued Name of Acquiring Company: Faber Enterprises Name of Acquired Company: Ann’s Tool Company Income Statement For the Year Ending December 31..... .... ½($56.......... 1.........750 ...... .... 42......750 3.500 1. .. ½($20.. ......000) (70..................980 (46...... Selling Expenses .........000 (7....................................000) ....000 ......................000 4.. .500 2.....000 15................. Net Income.......000 .000/8 years) Trucks....400 (55....... Dividend Income............ Adjustment .000 5....350) 2......... .......000 200.. ..000/2years) Copyright........................ .................645) ... ..........................3 for 30%) Income Statement Accounts Sales Revenue ........... (397.......... ...000 ..... 6........................ (2) New depreciation: Building..500 13................................ ...750) (2) (3) Adjustments Debit Credit ...620) ........000 Faber 6 Mo.600 ........ (620......... Amortization Expense—Ann’s Tool ..... (1) Reduce (sold) inventory to fair value... 22 1........... Interest Income....... ................000) 125.....000) (62.......250 294.........350) 18.............500 . Administrative Expenses .... Cost of Goods Sold .................................. 7..... (9....... .........000 (45........000 ................000) 25........... ....000) 2............................. Total Operating Expenses ..... (550.......000 1......................... .............. .. ............. .........000 ........650 ........ Amortization Expense—Faber............................. Depreciation Expense—Faber..................000 ...................000 150... (53........ 5... Gross Profit.........000 22................. Depreciation Expense—Ann’s Tool .......... ½($3... ...... 172................... . 3.......... Recorded amortization. 1—Problems Problem 1-9.... ........ .... .600) (2.............. .......000/2 years) Total new depreciation Recorded depreciation Adjustment 2...000/25 years) Equipment..............000) (4.... .........000) (350........705 (43....... (66...........800 ............000) ..000 .. ...... 343........

...........................................000 $ 15.........270 *($2.......... 1—Problems Problem 1-9............... Inventory ... Land ............................................... Tax provision (30%)..............000) 249.................................... Net income...............000 9.....................................830) $ 39......................................................100 2.......... Building .............................500 + $2............... $ 690...............000 40.. New Ann amortization and depreciation ....................600 + $1......................000 Net income...............................................000 50............................. Old Ann depreciation and amortization ($7..000) (40...............100 (16.............. $ 39.000 + $140.......... Notes payable ...............500 + $750 + $1......... 23 $270........................................000 85.......................................500) ................................................................. Concluded (2) Pro forma disclosure for 2011 as if acquisition occurred at the start of the year: Sales revenue ($550..........000 12.....................................000) (2.... Interest payable.........000 (22...........................000 12................................000) ................................................................. Accounts payable.....................270 Calculation of net income: Reported net incomes before tax ($66.............................500 + $2........000 .....000) = $11................500 (23.........000) ................................................500 + $1.............................................. Copyright.........................500 PROBLEM 1-10 Part A Total consideration for Iris: Common stock (10.................................. Inventory adjustment ... Investments...................................... Adjusted income before tax .................. Value of net identifiable assets acquired.............................................. Less fair value of net assets acquired: Accounts receivable ..........000 $ 21....................750 × 2 = $23.............................000 shares × $27)............................................. Equipment .................500 + $3......500)* $ 56........ $ 68.........................000 26........................................................................Ch...........................000 40................................ Patent......................................... Excess of total cost over fair value of net assets (goodwill)........................ Prepaid expenses ................000 33.................................................

.000 85..........................................................000) ...........................................000 shares × $5 par) .......000 Net income..................................................................................... $28.................................. Inventory ... Patent.......................... 1—Problems Problem 1-10.................000 40...................000 2.......... Paid-In Capital in Excess of Par ($270........ Building ............................... Check Totals 15................................................000 12..... Continued Journal Entry: Accounts Receivable...................................................................000 50.......................................................................................................................000 33.. Prepaid Expenses ............................................................000 – $50...... Investments...........000 26........ Common Stock (10.............................................. Cash............000 10.............000 .....................................................000 21..............000 Acquisition Expense..000 40............. Interest Payable ............. Dr...................................................Ch..........000 220. $475...................................................................................... Copyright............000 22.................................. Land .......000 Part B Summary disclosure: Sales revenue ........ Accounts Payable ......................................................000 334....................000 12......................................................... 10................................000 50.........920 24 334. = Cr.................................................................... Notes Payable.... Equipment .....000 40..................................................... Goodwill .....................................................................

..000 80..... 1—Problems Problem 1-10...................... ............................................... (1) (2) Adjust amortization as follows: New amounts: Patent ................. 100 .... Recorded............................................. .............000 ....400) .........600 ................................ 8........... (9........................... Investment Income...............500) (125................... (4) Expense acquisition costs........500) 20. .......... Equipment ...............900 62................. Acquisition Expense ..............000 .............. . ...................... ............. Concluded Worksheet for Pro Forma Income Statement For the Year Ending December 31................. Total Operating Expenses ..............................800 .......................... Credit (2) ..500 (39...... ............... 100 ............................................000 ....................... 2........900 Adjustment . (13................. 2012 (Tax rate expressed as 0................... Gross Profit.............................. ......... Depreciation Expense—Iris..000 ...................... 1..........000 10...........000) ........................................ .. Income Before Taxes ... ....... .......................................... $4..................000 3......... 10.. 163.............. $3. ..................... ..000 30......600 (30...........000) 3....000 (203... Pro Forma Combined Income Statement ....................... ..... Total Nonoperating Revenues and Expenses ............... ................. 120......000) 147..........000 (4.. 236........................600 Total new .... Adjustment... 2...000 (271......500) (48... Provision for Income Taxes (40%) ........ (475................ ................ .. Selling Expenses....................700) ..................280 (28............000) 204... ..000 5.....................600 (5........................ ............. ...500) .... Amortization Expense—Iris .. 400 ..400 ...000) 100..............................000) 55...600 $ 400 25 Adjustments Debit (3) (4) (1) ..200 Copyright .............000 ..... ...............000 (70............................ $ (100) Income Statement Accounts Adjust depreciation as follows: New amounts: Building .............500 9...................000 8... ............. (51........ ... Amortization Expense—Garman..................... (12......800 Recorded ..........200) 19.......... ....000 $9..........900) . Total new. .......000 12.................000) 20........ ............ ................................... Nonoperating Revenues and Expenses: Interest Expense ...........................500) ......... Net Income ............000 1......500 ......920) (3) Increase cost of goods sold to reflect fair value of beginning inventory.... Administrative Expenses ................................. (350.............000 50............. ................................................. ..... 3.500) ................... 3............... Depreciation Expense—Garman..Ch....... .................500 (7......... 12.. ...... 12.....000 (16................... Cost of Goods Sold ... .4 for 40%) Garman International Iris Company Sales Revenue........................ $1........... ............... ... 3... ..300 (34.................000) 3...... ... Operating Income..

............................................233 × 3........... Obligation Under Capital Lease of Equipment** .. ‡ Cash .........322 $ 382... Assets Under Operating Leases (fair)....................................... Present value of payments of $50........000 580...................... Leased Equipment Under Capital Lease (fair)......... 100............ Value assigned to identifiable net assets ............................................................000 382..........233 at 12%: $9..000 710......... Land (fair)...605 **Present value of 5 payments of $9...... 26 $2...... Goodwill‡ ....................................... Cash...................300...........000 per year for 5 years at 8%: $50................................................000 $ 199.............605 60.......... The use of a financial calculator or Excel will result in a minor (under $2) difference........ Less adjustment for $50........... *Recorded net investment in direct financing leases ........9927 ........6048 ..................635 (180.................................678 ............ Estimated Liabilities Under Lawsuit (estimate) ...............240)*** 19... 1—Problems PROBLEM 1-11 Current Assets ...000 400.........................000 per year for 5 years at 12%: $50..........................000 33.........000 100...678 150...................000 2.. Current Liabilities ...........................................Ch...................000 1................... Research & Development (fair)........ Buildings (fair) ................................................................................................000 × 3.....................000 200............................000 per year lease: Present value of payments of $50......................917..............283 ***PV amounts are based on tables at the end of text...........283 50....................... Net Investment in Direct Financing Leases* .............395 $710....................... Goodwill .....................................000 $730.....................................................000 × 3..300...............6048 = $33.....

..........000 Acquisition Expense........... Deferred Tax Liability ........................................................ Cash............................000 – $200...................000 increase).......000) from carryover losses Excess attributable to goodwill (net of deferred tax liability) .. 3................................... Bonds payable ...........................................................000 100....000 – $100...... Deferred tax asset (30% × $180.................................000 45...................................... Deferred Tax Asset .....000 par) ... Land and Buildings .....000 350.. Goodwill*.............................000 $ 91.........000 3................ 10...... Check Totals 150........ Paid-In Capital in Excess of Par ($650.....000 (200....... Deferred tax liability [30% × ($350...000 559..............................................000 Paid-In Capital in Excess of Par .................................................... Common Stock ($10 par) .......000) 54..................... Land and buildings ................. Bonds Payable ...000 ..........................................000 200................................................................................................. $650..000 550...................................000 $ 150......................................000 895..................................................................................000 shares × $65 fair value) ............................. Cash.................................... Equipment ($150................................................000 27 895.........000 *Price paid (10. = Cr............. 1—Problems PROBLEM 1-12 Current Assets ...................................000 350....................000)] from deferred increase in equipment value ................ Equipment .......000 (45........................000 54....................................Ch.................................................000 91.......000 10.............000) 250...............000 250...................... Dr.................. Fair value of net assets: Current assets........

................000 shares × $60) ............................000 60....................................740...................................... Investment in marketable securities .................000) 30...000 shares = $50..................... Accounts Receivable.........160.....000 1...............430....................................................000 190...... = Cr.000 120... Buildings.. Common Stock ($2 × 20...50 per share 28 1........................... Accounts payable.............000 = 870 shares $57...................200.. Land ..........................................................................................................................................................................000 $ (230.......................................................... Check Totals $1.................................200...000) 1. Equipment ................................................................000 150................................000 1................ Common Stock (870 shares × $2) .............Ch............. Excess of fair value of net assets over cost (gain) ....... Land .000 450.... Less fair value of net assets acquired: Cash...............740 .............740 1.........................000 1..... Investment in Marketable Securities ...............................................................000 60.................000) Dr..........740............................ Gain on Acquisition .........000 230............ 1—Problems PROBLEM 1-13 (1) Total consideration for Walsh: Common stock (20. Income tax payable .......000) (190..................................... Buildings...........000 – $40......000 (120.....50 × 20............ Accounts receivable ..................000 450.................. Value of net identifiable assets acquired............000 (2) Entry to record contingent consideration: Paid-In Capital in Excess of Par .......................... Amount of consideration = deficiency in price × shares: $2...................... Accounts Payable.. Paid-In Capital in Excess of Par ($1.....000 600............. Equipment ............000 Number of new shares needed: $50...............................................000 $ 30................................000 600.. Journal Entry: Cash.................... Income Tax Payable......................................................000 450....................000 40.......000 shares) .....................000 150...............000 450.......................

................................. Normal return on assets ($150.................. Current Liabilities ....... 29 150........ 9% Bonds Payable........000 + $100..............000 11....... Premium on Bonds Payable................ Profit in excess of normal return ........................................................000 × 3......................... $150..............................6806...... $107............................000 $ 45.......000 600......... Present value of excess of normal return for 5 years at 16%......Ch.......................000 + $160...................... The use of a financial calculator or Excel will result in a minor (under $2) difference........000 + $200...983 Goodwill: Expected return ($120...................000 + $140.....000 + $600.983 765...................9927..................... Land...............................................000 105.........................................2743.......................................180* $311.............000 200..000 + $150........ Cash................................803 204........... Building .....000) × 10%... Present value of bonds ... 1—Problems APPENDIX PROBLEM PROBLEM 1A-1 (1) Bonds: Present value of interest payments for 5 years at 8%...............................361 ............. Goodwill .....................................................000 100............................................................................................................ $27...............000) ÷ 5 ...................................344 120.....000 300........................... Present value of principal due in 5 years at 8%............. (2) Cash and Receivables......................................................344 *PV amounts are based on tables at the end of text........................000 + $180. $45............000 147.................................................................... $300..............000 × 0......................000 × 3...... Inventory .....000 $147.................

........ Rate................ Present value ............................................................................. Rate........................................................... building ........ $50.850 (200.............................................................. n ...................................................................................... n ......................................................................................................................................................... $529.................000) $329..................................................................................................................549 Mortgage payable: Payment ............................................................ n ............................... $40..............................850 Patent: Payment ..................................................... 1—Cases CASES CASE 1-1 Part A Confirmation: Building: Payment .Ch................ Rate...........................................2 $103.......010 30 ..........................................................000 5 0...............................................................................14 Present value ...................000 4 0.....................000 20 0. Balance.......... Land (20 acres × $10...........000) ................................................................ Present value ..............................................................................07 $205.......................................................................... $80........................

.....Ch.............................500 199......................................300............000 181....010 ......615 219........................000 103..................................010 1............615 219......615 219.................................................. Patent ..................................000 Rate .... Building ......................000 165............................... 80. Land.................................................406.... Goodwill ...................855 1.........615 219....................................................650 219..............................615 219...............................550 361..................615 219...............000 200...... Equipment.000 $ 106............................000) (120...................................615 519.. $1..................... Continued Part B (1) Discounted cash flows: Period 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Operating Capital 150........615 219.000 1................615 219............................615 219. Total 150...................500 199.............................................. NPV ...... Accounts Receivable ........ Total paid price for net assets.............615 219.................................................................615 219.............615 219.........615 0....855 (3) Entry to record acquisition: Cash Equivalents........000) (130.. Check Totals ...615 219..... 1............000) 300........................406................................615 219..000 180.........650 119....300......625...625.........000 329............855 (2) Fair value comparison: NPV of cash flows..............................615 Salvage/ (Capital Expenditures) (100....................... Current Liabilities ..............................615 219.......615 219....010 31 120...615 219................ Inventory ............615 219...000 181.....850 220..12 1.000 205.............. 1—Cases Case 1-1..... Excess of fair value...........615 89..............................615 219....615 219........ Cash........615 219............000 150........... = Cr.... Mortgage Payable .................................615 219..610 Dr...............615 219..615 219....................615 219......615 219...............615 99......................000 165......................615 219.................

.......... EPS.200......91 basic and $1..........67 for 2009 and $3............ Fair value of net identifiable assets (without goodwill) ........65 for 2008.............65 for 2009 and $3... Sixty-two percent of the total assets ($47..........................92 basic and adjusted for dilution.........000 1...000 Book value exceeds implied fair value... Book value................ including goodwill .610 CASE 1-2 1. The pro forma basic EPS............. 2009.....000 (361......................... Implied remaining goodwill.......................................... Basic EPS was $5............... Recorded goodwill............................Ch......300..............020...................... Merck’s 2009 income statement includes Schering-Plough amounts only after the acquisition date of November 3..... was $5.90 diluted for 2009.......8) will lead to future amortization charges........ Goodwill .............63 for 2008.................. adjusted for the merger... For 2008......000 $ 180.........200. 2.... was $1.... Impairment adjustment: Implied fair value of Frontier..... Concluded Part C Impairment test: Implied fair value of Frontier........ $1.... Required adjustment .... 1—Cases Case 1-1.... $1......................610) $ (181. 4.........................................9 ÷ $76.... That includes property plant and equipment and other intangible assets............589.. 3..........................................610) 181..... Positive aspects of the merger include: • Increased research and development pipeline • Increased pipeline of products in the approval process • Accelerate expansion into therapeutic products • Increased global presence • Cost savings though consolidation of activities • Additional savings through a restructuring program 32 ..... the pro forma EPS was $0........670.....................................000 1... goodwill is impaired. adjusted for dilution to common shareholders...... Goodwill Impairment Loss..........610 181..........................................

.......................000) Other liabilities ...000 Paid-In Capital in Excess of Par ($1..000..376............126............Ch. 3.................902...................................000 Intangible assets... Journal Entry: Cash and Cash Equivalents .........................000 Receivables ...... 269.................... 141...................000 par).............01) .............160..........000...000 Excess of total cost over fair value of net assets (goodwill) $2...000 Other Liabilities ......................807.............807...........000. $2............................000 Capitalized film costs ..000.........000) Deferred income tax liability....... 325..750..... 2.....................2 million shares × $30).........000 Less fair value of net assets acquired: Cash and cash equivalents......................000...000) Value of net identifiable assets acquired.. (1.............000..000..152.............................000 Accounts Payable ...000 Intangible Assets .............000 Goodwill ............... 1... 105.750....................................... 590. 1...................750............. 2.................750......... = Cr.................000 . 141..140........140......750... (83.........25)....000 33 5...000.......000 Capitalized Film Costs ....... 3......000.............152...................................121....... 1—Cases CASE 1-3 1..........................000...... 2.......000... The acquisition would be qualified as horizontal...............278....000.000 Accounts payable ..................... The total price paid and its assignment are as follows: Cash (79.121...........000 Common Stock.......750...................... 1.. $4......902..................000................................................000.....000 Receivables .............000 Deferred Income Tax Liability .......000......000.000... 269.750....................000 3........376......... 2...000......902...000 – $590.............. Check Totals 5............ $ 105..................000 Dr...........000 Total consideration . (325......................... 83..............................................000 Stock issued (59 million shares × $32..................000 Cash ...........000 × $0.................................... par value (59...

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