You are on page 1of 16

1 CHAPTER

Electronic Supplement to Chapter 1

POO LI N G O F I NT E RE ST S A C C OU N TIN G
Pooling of interests accounting for business combinations is a thing of the past under U.S.
GAAP. No new pooling combinations may be recorded after 2001. Many of the detailed issues
related to poolings concern the original recording of the combination. Because there are no new
poolings, this material is considerably less important than it was at the writing of prior editions of
this text. The information in this electronic supplement to Chapter 1 is primarily related to the
initial recording of poolings. Again, grandfathering of prior poolings makes it useful to understand
the recording of past poolings, but you will not need this accounting detail for transactions that
will not recur in the future.

Conditions for Pooling


The pooling of interests concept was based on the assumption that it was possible to unite owner-
ship interests through the exchange of equity securities without an acquisition of one combining
company by another. Accordingly, application of the concept was limited to those business
combinations in which the combining entities exchanged equity securities and the operations and
ownership interests continued in a new accounting entity.

ES1
Electronic Supplement to Chapter 1 ES1

The third condition for pooling was that none of the combining companies changed the equity
interest of the voting common stock in contemplation of effecting the combination within two
years before initiation of the plan of combination or between the dates of initiation and
consummation.
A fourth condition was that each of the combining companies reacquired shares of voting com-
mon stock only for purposes other than business combination, and that no company reacquired
more than a normal number of shares between the dates the plan was initiated and consummated.
This restriction on treasury stock transactions generally did not apply to shares purchased for stock
option or compensation plans.
The fifth condition required that the proportionate interest of each individual common stock-
holder in each of the combining companies remain the same as a result of the exchange of stock to
effect the combination. For example, if Stockholder A held 100 shares in the other combining
com- pany and Stockholder B held 200 shares, then Stockholder Hs interest in the pooled entity
must have been twice that of As for the combination to be a pooling of interests.
Condition 6 specified that the voting rights in the combined corporation be immediately
exercisable by the stockholders The final condition required resolution of the combination on the
date of consum- mation, with no provisions pending that related to the issue of securities or other
considerations.
ABSENCE OF PLANNED TRANSACTIONS The last group of conditions for a pooling of interests focused on
planned transactions of the combined entity. First, the combined corporation must not have
retired or reacquired stock issued to effect the combination. Second, the combined corporation
must not have entered into financial arrangements (such as long guarantees) for the benefit of
former stockholders of a combining company. Finally, the combined corporation must not have
planned to dispose of a significant part of the assets of the combining companies within two
years after the combination. Plants to dispose of assets that represented duplicate facilities were
permissible.
If all 12 of these conditions were met, the business combination was accounted for as a pooling
of interests; otherwise, the purchase method was used. Exhibit 1-1 reviews the 12 conditions for a
pooling of interests.
Attributes of Combining Companies EX H IB IT 1 -1
1 Autonomous (two-year rule) Tw e lv e Co n d it io n s
2 Independent (10% rule) fo r P ooli n g ( AP B
Op in io n N o .1 6 )
Manner of Combining Interests
1 Single transaction (or completed within one year after initiation)
2 Exchange of common stock (the substantially all rule: 90% or more)
3 No equity changes in contemplation of combination (two-year rule)
4 Shares reacquired only for purposes other than combination
5 No change in proportionate equity interests
6 Voting rights immediately exercisable
7 Combination resolved at consummation (no pending provisions)
Absence of planned Transactions
1 Issuing company cannot reacquire shares
2 Issuing company cannot make deals to benefit former stockholders
3 Issuing company cannot plan to dispose of assets within two years

Combining Stockholders Equities in a Pooling


In a pooling of interests, the recorded assets and liabilities of the separate companies became the
assets and liabilities of the surviving (combined) corporation. Because total assets and liabilities
equal the sum of the combining entities, so must the total equities. The capital stock of the surv iv-
ing corporation must have equaled the par or stated value of outstanding shares (after the issuance
of the new shares). Ordinarily, the retained earnings of the surviving corporation would have been
equal to the total retained earnings of the combining companies, but this was not possible when
the
par or stated value of outstanding shares of the surviving entity exceeded the paid in capital of the
combining companies. If total paid-in capital of the combining companies exceeded the par or
stated value of outstanding shares of the surviving entity, the amount of the excess became the
additional paid in capital of the surviving entity, and the total retained earnings of the combining
companies became the retained earnings of the surviving entity. Alternatively, if the par or stated
value of outstanding shares of the surviving entity exceeded the total paid-in capital of the
combining companies, the combined retained earnings balance was reduced by the excees, and the
surviving entity had no additional paid-in capital.
These relationships can be shown through a series of illustrations. Assume that immediately
before their pooling of interests business combination, the stockholders equity accounts for Jake
Corporation and Kate Corporation were as follows (all amounts are in thousands):
Jake Kate
Corporation Corporat
Capital stock, $10 par $100 $ 50
Additional paid-in capital 10 20
Total paid-in capital 110 70
Retained earnings 50 30
Net assets and equity $160 $100

In cases 1 and 2 that follow, the pooling was in the form of a merger, in which Jake
Corporation was the issuing corporation and the surviving entity. In cases 3, 4, and 5, the pooling
was in the form of a consolidation, and Pete Corporation was formed to take over the net assets of
Jake and Kate. Jake and Kate disappeared.

CASE 1: MERGER; PAID-IN CAPITAL EXCEEDS STOCK ISSUED


Jake, the surviving corporation, issued 7,000 shares of its stock for the net assets of Kate. In this
case, the $180,000 total paid in capital of the combining companies exceeded the $170,000 capital
stock of Jake by $10,000. As a result, Jake had capital stock of $170,000, additional paid-in
capital of $10,000, and retained earnings of $80,000, for a total equity of $260,000. Observe that
the net assets of the surviving entity still were equal to the total recorded assets of the combining
compa- nies. Jake recorded the pooling as follows:
Net assets (+A)
Capital stock, $10 par (+SE)
Retained earnings (+SE)
To record issuance of 7,000 shares in a pooling with
Kate Corporation.

CASE 2: MERGER; STOCK ISSUED EXCEEDS PAID-IN CAPITAL


Jake, the surviving entity, issued 9,000 shares of its stock for the net assets of Kate. In this case,
the
$190,000 capital stock of Jake exceeded the $180,000 total paid-in capital of the combining com-
panies by $10,000. The result was that Jake would have capital stock of $190,000, no additional
paid-in capital, and retained earnings of $70,000. Notice that the maximum retained earnings that
can be combined ($80,000) has been reduced by the $10,000 excess of capital stock over paid-in
capital. The entry on Jakes books was as follows:
Net assets (+A)
Additional paid-in capital (-SE)
Capital stock $10 par (+SE)
Retained earnings (+SE)
To record issuance of 9,000 shares in a pooling with
Kate Corporation.

The previous cases illustrated accounting procedures for a merger accounted for as a pooling of
interests. Accounting procedures for consolidation of Jake and Kate are illustrated by assuming
that Pete Corporation was formed to take over the net assets of Jake and Kate Corporations.
CASE 3: CONSOLIDATION; PAID-IN CAPITAL EXCEEDS STOCK ISSUED
Pete Corporation issued 15,000 shares of $10 par capital stock, 10,000 to Jake and 5,000 to Kate,
for their net assets. In this case, the stockholders equity of Pete, the surviving entity, was the
same as for Jake Corporation in Case 1. Pete, however, opened its books with the following entry:
Net assets (+A) 260
Capital stock, $10 par (+SE) 150
Additional paid-in capital (+SE) 30
Retained earnings (+SE) 80
To record issuance of 10,000 shares to Jake and 5,000
shares to Kate in a business combination accounted
for as a pooling of interests.

The $180,000 combined paid-in capital of Jake and Kate exceeded the $150,000 capital stock of
Pete, the surviving entity, so the $30,000 excess was the additional paid-in capital of the pooled
entity. Also, the $80,000 maximum retained earnings was pooled.

CASE 4: CONSOLIDATION; PAID-IN CAPITAL EXCEEDS STOCK ISSUED


Pete Corporation issued 17,000 shares of $10 par capital stock, 11,000 to Jake and 6,000 to Kate,
for their net assets. The stockholders equity of pete in this case was the same as Jakes stockhold-
ers equity in Case 2. Pete recorded the consolidation as follows:
Net assets (+A) 260
Capital stock, $10 par (+SE) 170
Additional paid-in capital (+SE) 10
Retained earnings (+SE) 80
To record issuance of 11,000 shares to Jake and 6,000
shares to Kate in a business combination accounted
for as a pooling of interests.

The $180,000 total paid-in capital of the combining entities exceeded the $170,000 capital stock
of
Pete; therefore, the $10,000 excess was the additional paid-in capital of the pooled entity, and the
$80,000 maximum retained earnings was pooled.

CASE 5: CONSOLIDATION; STOCK ISSUED EXCEEDS PAID-IN CAPITAL


Pete Corporation issued 19,000 shares of $10 par capital stock, 12,000 to Jake and 7,000 to Kate,
for their net assets. Petes stockholders equity in this case was the same as Jakes stockholders
equity in Case 3. The Entry on Petes books to record the pooling was as follows:
Net assets (+A) 260
Capital stock, $10 par (+SE) 190
Retained earnings (+SE) 70
To record issuance of 12,000 shares to Jake and 7,000
shares to Kate in a business combination accounted
for as a pooling of interests.

The $190,000 capital stock of Pete, the surviving entity, exceeded the $180,000 total paid-in capi-
tal of Jake and Kate, so the maximum pooled retained earnings was reduced by the $10,000 excess
to $70,000, and the pooled entity had no additional paid-in capital.
SUMMARY BALANCE SHEETS A summary balance sheet for the surviving entity in each of the five pool-
ing of interests business combinations is shown in Exhibit 1-2.
E XH I BI T 1- 2 Merger Jakes Books Consolidation Petes Books
S u mmar y B a la n c e Case 1 Case 2 Case 3 Case 4 Case 5
Sh ee t s fo r t h e F iv e
Po o lin g o f In t e re st s Net assets $260 $260 $260 $260 $260
C as e s
Capital stocks, $10 par $170 $190 $150 $170 $190

Additional paid in capital 10 30 10

Retained earnings 80 70 80 80 70

Stockholders equity $260 $260 $260 $260 $260

STOCK OF ONE COMBINING COMPANY HELO BY ANOTHER COMBINING COMPANY The method of accounting for the
stock of one combining company held by another combining company depends on whether the
stock is stock of the surviving entity. An investment in the common stock of the surviving entity is
returned to the surviving company in the combination and is treated as treasury stock of the com-
bined entity. Alternatively, an investment by the surviving entity in another combining company is
treated as stock retired as part of the combination.
Let us illustrate this requirement by assuming that Kam Corporation owned 200 shares of Lax
Corporation common stock at the consummation of the Kam and Lax merger. Kam carried its
Investment in Lax account at its $3,000 cost. Summary data (in thousands) for Kam and Lax are as
follows:
Kam

Investment in Lax $ 3
Other assets 197
Total $200
Capital stock, $10 per $100
Additional paid-in capital 50
Retained earnings 50
Total $200

If Kam was the surviving entity and issued 19,800 shares to Lax (a 1:1 exchange ratio), the
pooling of interests merger was recorded on Kams books as follows:
Net assets (+A) 30
Capital stock $10 par (+SE)
Additional paid in capital (+SE)
Retained earnings (+SE)
Investment in Lax (A)
To record merger with Lax Corporation

If Lax was the surviving entity and issued 10,000 shares of its own stock for 10,000 shares of
Kam
(a 1:1 exchange ratio), the pooling of interests merger was recorded on the books of Lax as follows:
Net assets (+A) 19
Treasury stock (-SE)
Capital stock, $10 par (+SE)
Additional paid-in capital (+ SE)
Retained earnings (+ SE)
To record merger with Kam Corporation.

In each of these examples, the net assets of the surviving entity were $3,000 less than the
recorded assets of the combining companies. The related effect on the combined stockholders
equity was to reduce paid-in capital when the investment was in the combining company and to
record treasury stock when the investment was in stock of the surviving entity.
Expenses Related to Pooling Combinations
The costs incurred to effect a business combination and to integrate the operations of the combin-
ing companies in a pooling were expenses of the combined corporation. For example, costs of
registering and issuing securities, providing stockholders with information, paying accountants and
consultants fees, and paying finders fees to those who discovered the combinable situation were
recorded as expenses of the combined entity in the period in which they were incurred. If Jake or
Pete Corporation in the preceding cases had incurred accountants fees, consultants fees, costs of
security registration, and other costs of combining, the combined net assets of the surviving entity
would have been less and combined expenses would have been greater. However, the capital stock
and pooled retained earnings recorded at April 1, 2001, would have been the same.
As discussed previously, financial statements of a pooled entity for the year of combination
should have been presented as if the combination had been consummated at the beginning of the
period. In addition, if comparative financial statements for prior years were presented, they must
have been restated on a combined basis with disclosure of the fact that the statements of
previously separate companies had been combined.5

POO LI N G AN D AC Q U IS IT IO N M ET HO D S CO M P AR E D

Comparative Illustration of the Pooling and Acquisition Methods


Comparative trial balances for Black Corporation and White Corporation at December 30, 2000,
just before the Black and White merger, together with the fair value of Whites identifiable assets
and liabilities, are shown in Exhibit 1-3.

EXH IB I T 1 -3
COMPARATIVE TRIAL BALANCES DECEMBER 30, 2000 (IN THOUSANDS)
Pre me r ge r Bo o k
Black White White Val ue a n d F ai r Val ue
Corporation Corporation Corporation In f o rmat io n
per Books per Books Fair Values

Cash $ 475 $ 125 $125

Receivablesnet 600 300 300

Inventories 800 200 250

Plant and equipmentnet 1,200 350 450

Cost of goods sold 1,000 325

Other expenses 325 100

Total debits $4,400 $1,400

Accounts payable $300 $180 $180

Other liabilities 200 120 120

Capital stock, $10 par 1,500 500

Additional paid-in capital 200 40

Retained earnings 650 110

Sales 1,550 450

Total credits $4,400 $1,400


E XH I BI T 1- 4 Pooling of Interests Acquisition
D i f f e r en ce s in Issuance of Securities
R eco r d in g t h e B la c k Investment in White (+A) 650 885
a n d W hi t e M er g e r
U n de r t h e Po o lin g Capital stock, $10 par (+SE) 500 500
o f In t er es t s an d
Ac qui si ti o n Me t h od s Additional paid-in capital (+SE) 40 385

Retained earnings (+SE) 110

Direct Costs of Combination


Expenses (E, -SE) 60 60

Cash (-A) 60 60

Allocation of Investment
Cash (+A) 125 125

Receivablesnet (+A) 300 300

Inventories (+A) 200 250

Plant and equipmentnet (+A) 350 450

Goodwill (+A) 100

Costs of goods sold (E, -SE) 325

Other expense (E, -SE) 100

Accounts payable (+L) 180 180

Other liabilities (+L) 120 120

Sales (R, +SE) 450

Investment in White (-A) 650 925

The Black and White merger was consummated on December 31, 2000, with Black
Corporation, the surviving entity, issuing 50,000 shares of $10 par common stock with a total
market value of
$885,000 for the net assets of White Corporation. The cost of registering and issuing the common
stock was $20,000, and other direct costs of the business combination amounted to $40,000. These
costs were paid by Black Corporation on December 31, 2000. Under GAAP, all costs related to
the acquisition must be expensed.
JOURNAL ENTRIES Journal entries to record the Black and White merger as a pooling of interests are
compared with entries necessary to record the merger as an acquisition in Exhibit 1-4. The first set
of entries compares the differences in recording the stock issued by Black Corporation in the
merger. Under the pooling method, we record the investment in White at $650,000, the book value
of Whites net assets on January 1, 2000 (capital stock plus additional paid-in capital plus retained
earnings). Under the acquisition method, we record the investment in White at the $885,000 mar-
ket value of the shares issued by Black Corporation on December 31, 2000, the date on which the
business combination was consummated. We combine the retained earnings of Black and White in
the entry to record the stock issuance under the pooling of interests method, but there is no change
in Black Corporations retained earnings when recording the combination as an acquisition.
The second section of Exhibit 1-4 shows journal entries to record additional costs of the busi-
ness combination under the pooling and acquisition methods. All additional costs of combination
are expenses when recording the combination.
A third set of comparative journal entries in Exhibit 1-4 shows assignment of the Investment in
White balance to specific assets and liabilities, and in the case of a pooling of interests, to sales and
expenses. We record assets and liabilities at their fair market values when applying the acquisition
method and at their book values under the pooling method. We record the excess of investment
cost ($925,000) over the fair value of identifiable net assets ($825,000) as goodwill under the
acquisition
method. The excess of fair value over historical cost to White, which was allocated to inventories
($60,000) and to plant and equipment ($100,000) under acquisition accounting, also will increase
future expenses and decrease future income as compared with the pooling method. Thus, income
of Black Corporation in subsequent years will be lower if we record the Black and White merger
as an acquisition rather than a pooling of interests.
FINANCIAL STATEMENTS Exhibit 1-5 compares the combined financial statements for Black Corporation
for 2000 for the acquisition and pooling methods. The differences in the comparative income
statements result from the combining of sales and expenses under the pooling method but not
under acquisition accounting.

BLACK CORPORATION COMPARATIVE FINANCIAL STATEMENTS FOR EXH IB I T 1 -5


THE YEAR ENDED DECEMBER 31,2000 C o mpa ra t iv e
Pooling of F in a nc ia l Sta t eme nt s
Interests Acquisition f o r t he B la c k a n d
Method Method W h it e Me r ge r in t he
Ye a r o f Bu si n e s s
Income Statement C omb i na ti o n
Sales $2,000 $1,550

Cost of sales (1,325) (1,000)

Other expenses (485) (325)

Net Income $ 190 $ 225

Retained Earnings Statement


Retained earnings January 1, 2000 (as reported) $ 650 $ 650

Increase from pooling 110

Retained earnings January 1, 2000 (as restated) 760

Net income 190 225

Retained earnings December 31, 2000 $ 950 $ 875

Balance Sheet
Assets

Cash $ 540 $ 540

Receivablesnet 900 900

Inventories 1,000 1,050

Plant and equipmentnet 1,550 1,650

Goodwill 100

Total assets $3,990 $4,240

Liabilities and stockholders equity


Accounts payable $ 480 $ 480

Other liabilities 320 320

Capital stock, $10 par 2,000 2,000

Additional paid-in capital 240 565

Retained earnings 950 875

Total liabilities and stockholders equity $3,990 $4,240


Total assets of Black Corporation at December 31, 2000, were $4,240,000 under the
acquisition method and $3,990,000 under the pooling method. This $250,000 balance sheet
difference is the result of allocating the excess of cost over book value acquired to inventories,
plant and equipment, and goodwill under the acquisition method.
The comparative balance sheets in Exhibit 1-5 show additional paid-in capital of $240,000 and
$565,000 under the pooling and acquisition methods, respectively. Additional paid-in capital
under the pooling method is equal to the excess of paid-in capital of the combining companies
($2,240,000) over the capital stock of the combined entity ($2,000,000). The $585,000 additional
paid-in capital under acquisition accounting is equal to the $200,000 beginning balance, plus
$385,000 from the issuance of the 50,000 shares in excess of par
value.
The pooled retained earnings of Black Corporation exceed the retained earnings of Black under
the acquisition method by $75,000. This difference stems from combining retained earnings under
the pooling method, as well as from the income differences discussed earlier. Note that significant
differ- ences in accounting for the retained earnings of a combined entity are possible under
generally accepted accounting principles. Accordingly, users of financial statements of
combined entities should be careful not to interpret the reported retained earnings balances as
amounts legally available for dividends. Such interpretations are questionable when the reports are
for separate legal entities, and they are even more suspect when we combine two or more entities
into one accounting entity.

D IS C LOS U R E RE Q UI R EM EN T S FO R A PO OL IN G
The combined corporation must disclose that the business combination was accounted for as a
pooling of interests. In addition, financial statement notes for the period of pooling should include
the names of the combined companies, a description of the shares issued, the details of the results
of operations of the separate companies before pooling, the nature of any asset adjustments to
adopt the same accounting practices, the details of the effect on retained earnings of changing the
fiscal period of a combining company, and a reconciliation of the issuing companys revenue and
earnings with combined amounts after the pooling. When a new corporation was formed in a
pool- ing, this last disclosure requirement could be met by disclosing the earnings of the separate
com- panies that comprised the combined earnings for the period.

ASSIGNMENT MA TERIAL

W 1-1
Explain the basic differences between the acquisition and pooling of interests methods of accounting for business
combinations.

W 1-2
Ordinarily, the retained earnings of the surviving corporation in a pooling of interests would be equal to the combined
retained earnings of the combining companies. Under what conditions would combined retained earnings be less than
or greater than the total retained earnings of the combining companies?

Electronic Supplement to Chapter 1 ES11

W 1-3
Explain how the direct and indirect costs of combination are recorded for acquisition business combinations and for
poolings of interests.

W 1-14
Expenses of a business combination
Carrier Corporation issued 100,000 shares of $20 par common stock for all the outstanding stock of Homer Corporation in
a business combination consummated on July 1, 2000. Carrier Corporation common stock was selling at $30 per share at
the time the business combination was consummated. Out-of-packet costs of the business combination were as follows:

Finders fee $50,000


Accountants fee (advisory) 10,000
Legal fees (advisory) 20,000
Printing costs 5,000
SEC registration costs and fees 12,000
Total $97,000

1. If the business combination were treated as a pooling of interests, the acquisition cost of the combination would
have been:
a $3,097,000
b $2,097,000
c $2,080,000
d None of the above
2. If the combination were treated as an acquisition, the acquisition cost of the combination would have been:
a $3,097,000
b $3,000,000
c $3,017,000
d None of the above

W 1-5
Income after a combination
Franklin and Harlow Corporations were combined on April 1, 2000, in a pooling of interests business combination, and
Harlow was dissolved. For the year 2000, the companies had the following earning records:

Franklin Corporation (January 1April 1) $ 40,000


Franklin Corporation (April 1December 31) 660,000
Harlow Corporation (January 1April 1) 200,000

1. Franklin, the surviving corporation, would have reported income for 2000 of:
a $660,000
b $700,000
c $860,000
d $900,000
2. Franklins financial statement notes for 2000 should have included:
a A description of all classes of preferred and common stock exchanged in the consummation of the pooling
b A reconciliation of Franklins revenue and earnings with combined amounts after the pooling of interests
c A description of any contingent payments that may result in 2001 from the pooling of interests
d The cost of acquiring Harlow
ES14 CHAPTER 1

W 1-6
Combining assets and equities
Patter Corporation issued 500,000 shares of its own $10 par common stock for all the outstanding stock of Simpson
Corporation in a merger consummated on July 1, 2000. On this date, Patter stock was quoted at $20 per share. Summary
balance sheet data for the two companies at July 1, 2000, just before combination, were as follows (in thousands):
Patte

Current assets $18,0


Plant assets 22,0
Total assets $40,0
Liabilities $12,0
Common stock, $10 par 20,0
Additional paid in capital 3,0
Retained earnings 5,0
Total equities $40,0

1. If the business combination were treated as a pooling of interests, the pooled retained earnings immediately after
the combination would have been:
a $5,000
b $6,000
c $7,000
d $8,000
2. If the business combination were treated as a pooling of interests, the additional paid in capital immediately after
the combination would have been:
a $5,000
b $4,000
c $3,000
d $2,000
3. If the business combination were treated as an acquisition and Simpsons identifiable net assets had a fair value of
$9,000,000, Patters balance sheet immediately after the combination would have showed goodwill of:
a $1,000
b $2,000
c $3,000
d $4,000

W 1-7
Journal entries to record business combinations
IceAge Company issued 120,000 shares of $10 par common stock with a fair value of $2,550,000 for all the voting
common stock of Jester Company. In addition, IceAge incurred the following additional costs:
Legal fees to arrange the business combination
Cost of SEC registration, including accounting and legal fees
Cost of printing and issuing new stock certificates
Indirect costs of combining including allocated
overhead and executive salaries

Immediately before the business combination in which Jester Company was dissolved, Jesters assets and equities
were as follows (in thousands):

Book Value Fair Value

Current assets $1,000


Plant assets 1,500
Liabilities 300
Common stock 2,000
Retained earnings 200

R E Q U I R E D : Assume that the business combination is a pooling of interests. Prepare all journal entries on
IceAges books to record the business combination.
Electronic Supplement to Chapter 1 ES15

W 1-8
Journal entries to record a pooling
On January 1, 2000, Placate Corporation held 2,000 shares of Service Corporation common stock acquired at $15 per
share several years earlier, On this date, Placate issued 1.5 of its $10 per shares for each of the other 98,000 out-
standing shares of Service in a pooling of interests in which Service Corporation was dissolved. Service Corporations
after-closing trial balance on December 31, 1999, consisted of the following (in thousands):
Current assets $ 800
Plant and equipmentnet 1,500
Liabilities $ 200
Capital stock, $5 par 500
Additional paid-in capital 1,000
Retained earnings 600
$2,300 $2,300

R E Q U I R E D : Prepare a journal entry (or entries) on Placates books to account for the pooling of interests.
(Hint: Do not forget to consider the 2,000 shares of Service held by Placate on January 1, 2000.)

W 1-9
Prepare balance sheets of pooled companies
Tansy Corporation issued its own common stock for all the outstanding shares of Vatters Corporation in a pooling of
interests business combination on January 1, 2000. The balance sheets of the two companies at December 31, 1999,
were as follows (in thousands):
Tansy Vatters

Current assets $15,000 $ 4,000


Plant assetsnet 40,000 6,000
Total assets $55,000 $10,000

Liabilities $10,000 $ 3,000


Common Stock, $10 par 30,000 4,000
Additional paid-in capital 3,000 2,000
Retained earnings 12,000 1,000
Total equities $55,000 $10,000

R E Q U I R E D : Prepare balance sheets for Tansy Corporation on January 1, 2000, immediately after the
pool- ing of interests in which Vatters was dissolved under the following assumptions:
1. Tansy issued 800,000 of its common shares for all of Vatters outstanding shares.
2. Tansy issued 1,000,000 of its common shares for all of Vatters outstanding shares.
ES16 CHAPTER 1

W 1-10
Journal entries to record pooling business combinations
Gladfresh and Farmstone Corporations entered into a business combination accounted for as a pooling of interests in
which Farmstone was dissolved. Net assets and stockholders equities of the two companies immediately before the
pooling follow (in thousands):

Gladfresh Farmstone

Net assets $1,000 $800


Capital stock, $10 par $ 400 $200
Additional paid-in capital 200 300
Total paid-in capital 600 500
Retained earnings 400 300
Total stockholders equity $1,000 $800

REQUIRED
1. Prepare the journal entry on Gladfresh Corporations books to record the pooling with Farmstone if
Gladfresh issued 35,000, $10 par common shares in exchange for all of Farmstone common shares.
2. Prepare the journal entry on Gladfresh Corporations books to record the pooling with Farmstone if
Gladfresh issued 77,000, $10 par common shares in exchange for all of Farmstone common shares.

W 1-11
Journal entries and balance sheet for a pooling of Interests
On January 2, 2000, Dual and Cowhill Corporation merged their operations through a business combination accounted
for as a pooling of interests. The $300,000 direct costs of combination were paid in cash by the surviving entity on
Electronic Supplement to Chapter 1 ES17

January 2,2000. At December 31, 1999, Cowhill held 25,000 shares of Dual stock acquired at $20 per share. Summary
balance sheet information for Dual and Cowhill Corporations at December 31, 1999, was as follows (in thousands):

Dual Corporation Cowhill Corporation

Current assets $ 6,500 $ 4,500


Plant and equipmentnet 10,000 10,000
Investment in Dual 500
Total assets $16,500 $15,000
Liabilities $ 1,500 $ 3,000
Common stock, $10 par 10,000 8,000
Additional paid in capital 2,000 3,000
Retained earnings 3,000 1,000
Total equities $16,500 $15,000

R E Q U I R E D : Assume that the surviving corporation was Dual Corporation and that Dual issued 1,000,000
shares of its own stock for all the outstanding shares of Cowhill Corporation.
a. Prepare journal entries on the books of Dual Corporation to record the business combination.
b. Prepare a balance sheet for Dual Corporation on January 2, 2000, immediately after the business combination.

W 1-12
Journal entries and balance sheet for a consolidation under a pooling of Interests
Patio Corporation was formed on January 2, 2000, to consolidate the operations of EPA Corporation and Century
Corporation. Summary balance sheets for the two companies at December 31, 1999, were as follows (in thousands):

EPA Corporation Century Corporation

Assets
Cash $ 3,000 $ 1,000
Receivablesnet 3,500 1,500
Inventories 6,000 7,000
Land 1,000 2,000
Buildingnet 7,500 3,000
Equipmentnet 3,000 5,500
Total assets $24,000 $20,000

Liabilities and Stockholders Equity


Accounts payable $ 2,700 $ 2,300
Bonds Payable 3,000
Capital stock 10,000 6,000
Additional paid-in capital 4,300 2,700
Retained earnings 4,000 9,000
Total Liabilities and
stockholders equity $24,000 $20,000

ADDITIONAL INFORMA TION


1. The stockholders of the combining corporations agreed to the following plan of combination:
a. Stockholders of EPA Corporation were to receive 1,300,000 common shares of $10 par stock of Patio
Corporation for their 5,000,000 shares of $2 par capital stock.
b. Stockholders of Century Corporation were to receive 1,200,000 common shares of Patio Corporation
for their 1,000,000 shares of $6 stated-value capital stock.
c. Both EPA Corporation and Century Corporation were to be dissolved.
2. The business combination was treated as a pooling of interests with January 2, 2000, as the date of initia-
tion and consummation of the plan.
3. The inventories of Patio were to be maintained on a FIFO basis. Accordingly, Centurys December 11,
1999, LIFO inventory was adjusted to its $8,000,000 FIFO cost.
4. Costs of registering and issuing securities in the combination amounted to $60,000, and other direct costs
of combination totaled $140,000 These costs were paid by Patio on January 2, 2000, from cash obtained
from the other combining companies.
ES18 CHAPTER 1

REQUIRED
1. Prepare journal entries on the books of Patio Corporation to:
a. Record the issuance of 1,300,000 shares to the stockholders of EPA Corporation.
b. Record the issuance of 1,200,000 shares to the stockholders of Century Corporation.
c. Record payment of the costs of business combination.
2. Prepare a balance sheet for Patio Corporation at January 2,2000, immediately after the business combina-
tion has been consummated.

W 1-13
Comparative balance sheets under the pooling and acquisition methods
On January 1, 2000, Ainsley Corporation issued 500,000 shares of its capital stock for all of Biker
Corporations outstanding shares and Biker was dissolved. The fair value of Ainsleys common stock on
this date was
$25 per share. The book values and fair values of Ainsley and Biker at December 31, 1999, were as follows (in thousands):

Ainsley Corporation Biker Corporation


Book Value Fair Value Book Val

Assets
Cash $ 3,000 $ 3,000 $ 1,000
Receivablesnet 5,500 5,500 2,000
Inventories (LIFO) 6,000 7,000 3,500
Other current assets 1,500 1,500 500
Plant assetsnet 16,000 19,000 5,000
Total assets $32,000 $ 36,000 $12,000

Equities
Accounts payable $ 5,000 $ 5,000 $ 1,800
Other liabilities 3,800 4,000 3,200
Capital stock $10 par 15,000 3,000
Other paid-in capital 3,000 1,200
Retained earnings 5,200 2,800
Total equities $32,000 $12,000

R E Q U I R E D : Prepare comparative balance sheets for Ainsley Corporation immediately after the business
combination, assuming that (a) the combination was a pooling of interests and (b) the combination was an
acquisition.