Chapter 1 BUSINESS COMBINATIONS Ans w e r s to Que s ti o n s 1 A busines s combin ation is a union of busines s entities in which two or more previousl

separ a t e an! in!ep e n ! e n t comp a nie s are brou"ht un!er the control of a sin"le man a " e m e n t tea m# APB Opinion No. 16 !escribes three situations that establish the control neces s a r for a busines s combina tion$ nam el $ when one or more corporations beco m e subsi!iaries$ when one comp a n transfers its net ass ets to anoth er$ an! when each combinin" comp a n transfers its net ass ets to a newl forme ! corpora tion# 2 The !issolution of all but one of the separ a t e le"al entities is not neces s a r for a busines s combina tion# An e%a m ple of one form of busines s combina tion in which the separ a t e le"al entities are not !issolve! is when one corpora tion beco m e s a subsi!iar of anoth er# In the case of a paren t& subsi!iar relations hip$ each combinin" comp a n continu e s to e%ist as a separ a t e le"al entit even thou" h both comp a nie s are un!er the control of a sin"le man a " e m e n t tea m# 3 A busines s combin ation occurs when two or more previousl separ a t e an! in!ep e n ! e n t comp a ni e s are brou"ht un!er the control of a sin"le man a " e m e n t tea m# Mer"er an! consoli!ation in a "en eric sens e are fre'ue n tl use! as s non m s for the term busines s com bination # In a technical sens e$ however$ a m erg er is a t pe of busines s combina tion in which all but one of the combinin" entities are !issolve! an! a consolidation is a t pe of busines s combina tion in which a new corporation is forme! to ta(e over the ass e ts of two or more previousl separ a t e comp a nie s an! all of the combinin" comp a nie s are !issolve!# 4 )oo!will arises in a busines s combin ation account e ! for un!er the purch as e metho ! when the cost of the invest m e n t *price pai! plus !irect costs+ e%ce e ! s the fair value of i!entifiable net ass et s ac'uire!# Un!er FASB State m e n t No. 142 $ "oo!will is no lon"er amorti,e! for financial reportin" purpos e s an! will have no effect on net income# 5 Ne"ative "oo!will is the opposite of "oo!will# It results from a purch as e busines s combin ation in which the fair value of i!entifiable net ass ets ac'uire! e%ce e ! s the invest m e n t cost# An ne" ative "oo!will must be applie! to a proportion a t e re!uction of noncurr e n t ass e ts other than mar(et a bl e

Busines s Combinations securities# If ne" ative "oo!will is "reat e r than the fair value of all noncurre n t ass ets ac'uire! other than mar(et a bl e securities$ the e%ces s is shown in the balanc e shee t as a !eferre ! cre!it#

Chapt er 1

SOLUTIONS TO EXERCISES Solution E1-1 1 2 3 4 5 a b a c d

/
Solution E1-2 [AICPA adapted] 1 d

Busines s Combinations

Plant and equipment should be recorded at $45,000, the $55,000 fair value less the $ 0,000 e!cess fair value of net assets acquired over investment cost" 2 c Investment cost $ess% &air value of net assets Cash Inventor' Propert' and equipment)net $iabilities -ood.ill $ #0,000 (0,000 5*0,000 + #0,000, *50,000 $ 50,000 $#00,000

Chapt er 1

Solution E1-3

/toc0holders1 equit' ) Pillo. Corporation on 2anuar' 3 Capital stoc0, $ 0 par, 300,000 shares outstandin4 Additional paid)in capital [$500,000 6 $ ,500,000 ) $5,000] 7etained earnin4s 8otal stoc0holders1 equit' 9ntr' to record combination% Investment in /leep)ban0 Capital stoc0, $ 0 par Additional paid)in capital Investment in /leep)ban0 Additional paid)in capital Cash Chec0% :et assets per boo0s -ood.ill $ess% Issuance of stoc0 $3,000,000 $ ,500,000 ,500,000 $ 0,000 5,000 $ 5,000 $3,#00,000 ,5 0,000 + 5,000, $5,5(5,000 $3,000,000 ,*(5,000 *00,000 $5,5(5,000

1
Solution E1-4

Busines s Combinations

2ournal entries on IceA4e1s boo0s to record the purchase Investment in 2ester Common stoc0, $ 0 par Additional paid)in capital $5,550,000 $ ,500,000 ,350,000

8o record issuance of 50,000 shares of $ 0 par common stoc0 .ith a fair value of $5,550,000 for the common stoc0 of 2ester in a purchase business combination" Investment in 2ester Additional paid)in capital 9!penses of combination ;ther assets $ 55,000 5,000 50,000 $ *0,000

8o record costs of re4isterin4 and issuin4 securities as paid)in capital, direct cost of combination as investment, and indirect costs of combination as e!penses" Current assets Plant assets $iabilities Investment in 2ester $ , 00,000 ,<<5,000 $ 300,000 5,5<5,000

8o record allocation of the $5,5<5,000 cost of 2ester Compan' to identifiable assets and liabilities accordin4 to their fair values, computed as follo.s% Cost &air value acquired :e4ative 4ood.ill Plant assets at fair value $ess% :e4ative 4ood.ill Cost allocated to plant assets $5,5<5,000 3,000,000 $ 455,000 $5,500,000 455,000 $ ,<<5,000

Chapt er 1

Solution E1-5 2ournal entries on the boo0s of =anders Corporation to record mer4er .ith >arrison Corporation% Investment in >arrison Common stoc0, $ 0 par Additional paid)in capital Cash 8o record issuance of #,000 common shares and pa'ment of cash in the acquisition of >arrison Corporation in a mer4er" Investment in >arrison Additional paid)in capital Cash 8o record costs of re4isterin4 and issuin4 securities and additional direct costs of combination" Cash Inventories ;ther current assets Plant assets)net -ood.ill Current liabilities ;ther liabilities Investment in >arrison 8o record allocation of cost to assets received and liabilities assumed on the basis of their fair values and to 4ood.ill computed as follo.s% Cost of investment &air value of assets acquired -ood.ill $*00,000 3<0,000 $530,000 $ 40,000 00,000 50,000 5#0,000 530,000 $ 30,000 40,000 *00,000 $ <0,000 30,000 $ 00,000 $530,000 $ #0,000 50,000 500,000

3
SOLUTIONS TO PROBLEMS Solution P1-1

Busines s Combinations

Preliminary computations Cost of investment in /ain at 2anuar' 5 +30,000 shares ! $50, 6 $55,000 direct costs of combination $*55,000 ?oo0 value acquired +440,000, 9!cess cost over boo0 value acquired $ #5,000 9!cess allocated to% Current assets 7emainder to 4ood.ill 9!cess cost over boo0 value acquired $ 40,000 45,000 $ #5,000

Pine Corporation ?alance /heet at 2anuar' 5, 5004 Assets Current assets +$ 30,000 6 $*0,000 6 $40,000 e!cess ) $40,000 direct costs, $and +$50,000 6 $ 00,000, ?uildin4s)net +$300,000 6 $ 00,000, 9quipment)net +$550,000 6 $540,000, -ood.ill 8otal assets Liabilities and Stockholders' Equity Current liabilities +$50,000 6 $*0,000, Common stoc0, $ 0 par +$500,000 6 $300,000, Additional paid)in capital [$50,000 6 +$ 0 ! 30,000 shares, ) $ 5,000 costs of issuin4 and re4isterin4 securities] 7etained earnin4s 8otal liabilities and stoc0holders1 equit' $ 0,000 #00,000 $ ,345,000 $ (0,000 50,000 400,000 4*0,000 45,000

335,000 00,000 $ ,345,000

Chapt er 1

Solution P1-2 Preliminary computations Cost of acquirin4 /eabird +$#55,000 6 $ 00,000 direct costs, &air value of assets acquired and liabilities assumed -ood.ill from acquisition of /eabird Peli an Corporation ?alance /heet at 2anuar' 5, 5003 Assets Current assets Cash [$ 50,000 6 $30,000 ) $ 40,000 e!penses paid] Accounts receivable)net [$530,000 6 $40,000 fair value] 5<0,000 Inventories [$550,000 6 $ 50,000 fair value] Plant assets $and [$400,000 6 $ 50,000 fair value] ?uildin4s)net [$ ,000,000 6 $300,000 fair value] 9quipment)net [$500,000 6 $550,000 fair value] -ood.ill 8otal assets Liabilities and Stockholders' Equity Liabilities Accounts pa'able [$300,000 6 $40,000] :ote pa'able [$*00,000 6 $ #0,000 fair value] Stockholders' equity Capital stoc0, $ 0 par [$#00,000 6 +33,000 shares ! $ 0,] , 30,000 ,055,000 500,000 $3,#05,000 $ 340,000 <#0,000 550,000 ,300,000 <50,000 555,000 $3,#05,000 *40,000 $ 40,000 $(55,000 *<0,000 $555,000

;ther paid)in capital [$*00,000 ) $40,000 6 +$#55,000 ) $330,000,] 7etained earnin4s 8otal liabilities and stoc0holders1 equit'

15
Solution P1-3

Busines s Combinations

Persis issues 55,000 shares of stoc0 for /ineco1s outstandin4 shares% 1a Investment in /ineco Capital stoc0, $ 0 par ;ther paid)in capital $<50,000 $550,000 500,000

8o record issuance of 55,000, $ 0 par shares .ith a mar0et price of $30 per share in a purchase business combination .ith /ineco" Investment in /ineco ;ther paid)in capital Cash $ 30,000 50,000 $ 50,000

8o record costs of combination in a purchase business combination .ith /ineco" Cash Inventories ;ther current assets $and Plant and equipment)net -ood.ill $iabilities Investment in /ineco 8o record allocation of investment cost to identifiable assets and liabilities accordin4 to their fair values and the remainder to 4ood.ill" -ood.ill is computed% $<#0,000 cost ) $5<0,000 fair value of net assets acquired" 1! Per"i" Corporation ?alance /heet 2anuar' 5, 5004 +after purchase business combination, Assets Cash [$<0,000 6 $ 0,000] Inventories [$50,000 6 $*0,000] ;ther current assets [$ 00,000 6 $ 00,000] $and [$#0,000 6 $ 00,000] Plant and equipment)net [$*50,000 6 $350,000] -ood.ill 8otal assets Liabilities and Stockholders' Equity $iabilities [$500,000 6 $50,000] Capital stoc0, $ 0 par [$500,000 6 $550,000] ;ther paid)in capital [$500,000 6 $500,000 ) $50,000] 7etained earnin4s 8otal liabilities and stoc0holders1 equit' $ #0,000 0,000 500,000 #0,000 ,000,000 5 0,000 $ ,<#0,000 $ 550,000 <50,000 *#0,000 00,000 $ ,<#0,000 $ 0,000 *0,000 00,000 00,000 350,000 5 0,000 $ 50,000 <#0,000

Chapt er 1

11

Solution P1-3 +continued, Persis issues 2a 5,000 shares of stoc0 for /ineco1s outstandin4 shares% $450,000 $ 50,000 300,000 Investment in /ineco + 5,000 shares ! $30, Capital stoc0, $ 0 par ;ther paid)in capital 8o record issuance of 5,000, $ 0 par common shares .ith a mar0et price of $30 per share" Investment in /ineco ;ther paid)in capital Cash 8o record costs of combination in the purchase of /ineco" Cash Inventories ;ther current assets $and Plant and equipment)net $iabilities Investment in /ineco 8o assi4n the $4#0,000 cost of /ineco to current assets and liabilities on the basis of their fair values and to noncurrent assets on the basis of fair value less a proportionate share of the e!cess of fair value over investment cost as follo.s% &air value of net assets acquired $5<0,000 Investment cost 4#0,000 9!cess fair value over cost $ (0,000 9!cess allocated to reduce% $and +$ 00,000@$450,000 ! $(0,000, $ 50,000 Plant and equipment +$350,000@$450,000 ! $(0,000, <0,000 7eduction in fair value of noncurrent assets $ (0,000 $ 0,000 *0,000 00,000 #0,000 5#0,000 $ 50,000 4#0,000 $ 30,000 50,000 $ 50,000

12!

Busines s Combinations

Per"i" Corporation ?alance /heet 2anuar' 5, 5004+after purchase business combination, Assets Cash [$<0,000 6 $ 0,000] Inventories [$50,000 6 $*0,000] ;ther current assets [$ 00,000 6 $ 00,000] $and [$#0,000 6 $#0,000] Plant and equipment)net [$*50,000 6 $5#0,000] 8otal assets Liabilities and stockholders' equity $iabilities [$500,000 6 $50,000] Capital stoc0, $ 0 par [$500,000 6 $ 50,000] ;ther paid)in capital [$500,000 6 $300,000 ) $50,000] 7etained earnin4s 8otal liabilities and stoc0holders1 equit' $ #0,000 0,000 500,000 *0,000 (30,000 $ ,4#0,000 $ 550,000 *50,000 4#0,000 00,000 $ ,4#0,000

Chapt er 1

1.

Solution P1-4 1 /chedule to allocate investment cost to assets and liabilities 00A, $300,000 3*0,000 $ *0,000 &inal Allocation $ 0,000 50,000 30,000 #5,000 5<,500 5<,500 +30,000, +<0,000, )))

Investment cost, 2anuar' , 5004 &air value acquired from /en +$3*0,000 ! 9!cess fair value acquired over cost Allocation%

Initial Allocation Cash 7eceivables)net Inventories $and ?uildin4s)net 9quipment)net Accounts pa'able ;ther liabilities 9!cess fair value 8otals $ 0,000 50,000 30,000 00,000 50,000 50,000 +30,000, +<0,000, +*0,000,

7eallocation ))) ))) ))) $+ 5,000, +55,500, +55,500, ))) ))) *0,000 0

$300,000

$300,000

P#ule Corporation ?alance /heet at 2anuar' , 5004+after combination, Liabilities $ 55,000 *0,000 50,000 30,000 35<,500 30<,500 Accounts pa'able :ote pa'able +5 'ears, ;ther liabilities $iabilities Stockholders' Equity Capital stoc0, $ 0 par ;ther paid)in capital 7etained earnin4s /toc0holders1 equit' 8otal assets $ ,000,000 8otal equities 300,000 00,000 0,000 5 0,000 $ ,000,000 $ 50,000 500,000 <0,000 4(0,000

Assets Cash 7eceivables)net Inventories $and ?uildin4s)net 9quipment)net

1/

Busines s Combinations

Solution P1-5 1 2ournal entries to record the acquisition of =a.n Corporation Investment in =a.n Capital stoc0, $ 0 par ;ther paid)in capital Cash $5,500,000 $ ,000,000 ,000,000 500,000

8o record purchase of =a.n for 00,000 shares of common stoc0 and $500,000 cash" Investment in =a.n ;ther paid)in capital Cash $ 00,000 50,000 $ 50,000

8o record pa'ment of costs to re4ister and issue the shares of stoc0 +$50,000, and other costs of combination +$ 00,000," Cash Accounts receivable :otes receivable Inventories ;ther current assets $and ?uildin4s 9quipment Accounts pa'able Bort4a4e pa'able, 0A Investment in =a.n $ 540,000 3*0,000 300,000 500,000 500,000 (0,000 , 40,000 5<0,000 300,000 *00,000 5,*00,000 $

8o assi4n the cost of =a.n to current assets and liabilities on the basis of their fair values and to noncurrent assets on the basis of fair value less a proportionate share of the e!cess of fair value over investment cost as sho.n in the follo.in4 allocation schedule% Purchase price &air value of net assets acquired :e4ative 4ood.ill 9!cess applied to reduce noncurrent assets $ 00,000@$5,000,000 e!cess C 5A reduction,% $and $ 500,000 ) $ 0,000 C ?uildin4s ,500,000 ) *0,000 C 9quipment *00,000 ) 30,000 C $5,*00,000 5,<00,000 $ 00,000 +noncurrent $ (0,000 , 40,000 5<0,000 assets

Chapt er 1

10

11
Solution P1-5 +continued, 2

Busines s Combinations

Celi"tia Corporation ?alance /heet at 2anuar' 5, 5003+after business combination, Assets

Current Assets Cash Accounts receivable)net :otes receivable)net Inventories ;ther current assets Plant Assets $and ?uildin4s)net 9quipment)net 8otal assets

$ 5,5(0,000 ,**0,000 ,#00,000 3,000,000 (00,000 $ 5, (0,000 0, 40,000 0,5<0,000

$(,(50,000

55,(00,000 $35,#50,000

Liabilities and Stockholders' Equity $iabilities Accounts pa'able Bort4a4e pa'able, $ 0A $ ,300,000 5,*00,000 ,000,000 #,(50,000 *,000,000

$ *,(00,000

/toc0holders1 9quit' Capital stoc0, $ 0 par ;ther paid)in capital 7etained earnin4s

55,(50,000 $35,#50,000

8otal liabilities and stoc0holders1 equit'