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SPECIAL APPENDIX 1

UNDERSTANDING THE ISSUES

1. In order to record the shares acquired at fair quired for monetary consideration. Thus, if 90%
value, the individual stockholders residual in- of the shares were acquired from noncontrolling
terest must have increased and the new resi- group stockholders, but the total monetary con-
dual interest must be under 5%; or the stock- sideration given to all former owners was 70%,
holders residual interest decreased and (a) the only 70% of the shares acquired from the for-
voting interest must be under 20%, (b) the indi- mer noncontrolling group could be recorded at
vidual supplied less than 20% of the companys fair value. The balance of the shares would be
total capital including debt, and (c) the new re- recorded at book value.
sidual interest is less than 5%, and all the for-
3. Eighty-five percent of the shares would be rec-
mer owners whose ownership interest de-
orded at fair value on the date of the acquisi-
creased must be under 20%.
tion. Generally, the remaining shares would be
Those shares not recorded at fair value are recorded at their owners simple-equity-
recorded at the simple-equity-adjusted cost of adjusted cost. There are, however, exceptions
the owner. for owners with a less than 5% interest that
would allow the shares of the continuing stock-
2. When at least 80% of the consideration given is
holders to be recorded at current fair value.
not monetary, the shares recorded at fair value
are limited to the percentage of shares ac-

SA-1
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SA1Exercises

EXERCISES

EXERCISE SA1-1

(1) 9,000 noncontrolling group shares at $40 market value* ........................... $360,000
1,000 controlling group shares at $25 equity-adjusted cost ....................... 25,000
Total cost .................................................................................................... $385,000
*80% test met: 9,000 10,000 = 90% acquired for cash.

(2) 8,000 noncontrolling group shares at $40 market value* ........................... $320,000
2,000 controlling group shares at $25 equity-adjusted cost ....................... 50,000
Total cost .................................................................................................... $370,000
*80% test met: 8,000 10,000 = 80% acquired for cash.

(3) 7,000 noncontrolling group shares at $40 market value* ........................... $280,000
2,000 noncontrolling group shares at $33 book value
($330,000 10,000 shares) ................................................................ 66,000
1,000 controlling group shares at $25 equity-adjusted cost ....................... 25,000
Total cost .................................................................................................... $371,000
*80% test not met: 7,000 10,000 = 70% acquired for cash.

SA-2
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SA1Exercises

EXERCISE SA1-2

Calculation of cost:
7,000 noncontrolling group shares at $40 market value* ........................... $280,000
2,000 noncontrolling group shares at $35 book value
($350,000 10,000 shares) ................................................................ 70,000
1,000 controlling group shares at $38 equity-adjusted cost ....................... 38,000
Total cost .................................................................................................... $388,000
*80% test not met: 7,000 10,000 = 70% acquired for cash.

Determination and Distribution of Excess Schedule


80% Investment
Price paid for investment ($280,000 + $38,000) ................................................ $318,000
Less interest acquired:
Equity ($350,000 80%) ............................................................................. 280,000
$ 38,000
Property, plant, and equipment ($30,000 80%) .............................................. 24,000
Goodwill ............................................................................................................. $ 14,000

Hercules Corporation
Balance Sheet
January 1, 20X1

Assets Liabilities and Stockholders Equity


Cash ................................................ $ 50,000 Long-term debt .......................... $160,000
Inventory.......................................... 100,000 Common stock (6,000
shares $10).......................... 60,000
Property and plant ........................... 224,000 Paid-in capital in excess of par
Goodwill........................................... 14,000 [(1,000 $28) + (2,000
$25) + (3,000 $30)] .............. 168,000
Total assets ..................................... $388,000 Total liabilities and equity .......... $388,000

SA-3
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SA1Problem

PROBLEM

PROBLEM SA1-1

(1) Calculation of cost:


7,000 noncontrolling group shares at $50 fair value* ............................. $350,000
2,000 noncontrolling group shares at $30.50 book value
($305,000 10,000) .......................................................................... 61,000
1,000 controlling group shares at $45 equity-adjusted cost ................... 45,000
Total cost................................................................................................ $456,000
*80% test not met: 7,000 10,000 = 70% acquired for cash. Only those shares acquired with
monetary consideration may be recorded at fair value.

Determination and Distribution of Excess Schedule


80% Investment

Price paid ($350,000 + $45,000) ................................................................ $395,000


Equity ($305,000 80%) ............................................................................ 244,000
Excess of cost over book value (debit balance) ......................................... $151,000
Inventory ($20,000 80%) ......................................................................... (16,000)
Equipment ($25,000 80%) ....................................................................... (20,000)
Building ($80,000 80%) ........................................................................... (64,000)
Goodwill ...................................................................................................... $ 51,000

Entries:
Cash ......................................................................................... 100,000
Common Stock ($10 par).................................................... 40,000
Paid-In Capital in Excess of Par ......................................... 60,000
To record formation of Newtone Corporation.
Cash ......................................................................................... 250,000
Bonds Payable.................................................................... 250,000
To record borrowing for the buyout.

SA-4
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SA1Problem

Problem SA1-1, Continued

Cash ......................................................................................... 60,000


Inventory ($130,000 + $16,000 + $2,000) ................................ 146,000
Accounts Receivable ................................................................ 40,000
Equipment ($75,000 + $20,000) ............................................... 95,000
Building ($120,000 + $64,000) ................................................. 184,000
Land .......................................................................................... 30,000
Goodwill .................................................................................... 51,000
Bonds Payable.................................................................... 150,000
Common Stock (6,000 shares $10 par) ........................... 60,000
Paid-In Capital in Excess of Par
[($45,000 + $61,000) $60,000 par] ........................... 46,000
Cash ................................................................................... 350,000
To record the acquisition of Oldtime.

(2) Calculation of cost:


9,000 noncontrolling group shares at $50 fair value
(includes 1,000 shares for 2,000 shares traded)* ............................ $450,000
1,000 controlling group shares at $45 equity-adjusted cost ................... 45,000
Total cost................................................................................................ $495,000
*80% test met: 8,000 10,000 = 80% acquired for cash. All noncontrolling shares may be
recorded at fair value.

Determination and Distribution of Excess Schedule


100% Investment

Price paid ($450,000 + $45,000) ................................................................ $495,000


Equity ($305,000) ....................................................................................... (305,000)
Excess of cost over book value (debit balance) ......................................... $190,000
Inventory ($20,000) .................................................................................... (20,000)
Equipment ($25,000) .................................................................................. (25,000)
Building ($80,000) ...................................................................................... (80,000)
Goodwill ...................................................................................................... $ 65,000

SA-5
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SA1Problem

Problem SA1-1, Concluded

Entries:
Cash ......................................................................................... 100,000
Common Stock ($10 par).................................................... 40,000
Paid-In Capital in Excess of Par ......................................... 60,000
To record formation of Newtone Corporation.
Cash ......................................................................................... 300,000
Bonds Payable.................................................................... 300,000
To record borrowing for the buyout.
Cash ......................................................................................... 60,000
Inventory ($130,000 + $20,000) ............................................... 150,000
Accounts Receivable ................................................................ 40,000
Equipment ($75,000 + $25,000) ............................................... 100,000
Building ($120,000 + $80,000) ................................................. 200,000
Land .......................................................................................... 30,000
Goodwill .................................................................................... 65,000
Bonds Payable.................................................................... 150,000
Common Stock (5,000 shares $10 par) ........................... 50,000
Paid-In Capital in Excess of Par
[($50,000 + $45,000) $50,000 par] ............................ 45,000
Cash ................................................................................... 400,000
To record the acquisition of Oldtime.

SA-6