SMch01Beams.docx
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SMch01Beams
Chapter1
BUSINESSCOMBINATIONS
AnswerstoQuestions
1Abusinesscombinationisaunionofbusinessentitiesinwhichtwoormorepreviouslyseparateandindependentcompaniesarebroughtunderthecontrolofasinglemanagementteam.Threesituationsestablishthecontrolnecessaryforabusinesscombination,namely,whenoneormorecorporationsbecomesubsidiaries,whenonecompanytransfersitsnetassetstoanother,andwheneachcombiningcompanytransfersitsnetassetstoanewlyformedcorporation.
2Thedissolutionofallbutoneoftheseparatelegalentitiesisnotnecessaryforabusinesscombination.Anexampleofoneformofbusinesscombinationinwhichtheseparatelegalentitiesarenotdissolvediswhenonecorporationbecomesasubsidiaryofanother.Inthecaseofaparent-subsidiaryrelationship,eachcombiningcompanycontinuestoexistasaseparatelegalentityeventhoughbothcompaniesareunderthecontrolofasinglemanagementteam.
3Abusinesscombinationoccurswhentwoormorepreviouslyseparateandindependentcompaniesarebroughtunderthecontrolofasinglemanagementteam.Mergerandconsolidationinagenericsensearefrequentlyusedassynonymsforthetermbusinesscombination.Inatechnicalsense,however,amergerisatypeofbusinesscombinationinwhichallbutoneofthecombiningentitiesaredissolvedandaconsolidationisatypeofbusinesscombinationinwhichanewcorporationisformedtotakeovertheassetsoftwoormorepreviouslyseparatecompaniesandallofthecombiningcompaniesaredissolved.
4Goodwillarisesinabusinesscombinationaccountedforundertheacquisitionmethodwhenthecostoftheinvestment（fairvalueoftheconsiderationtransferred）exceedsthefairvalueofidentifiablenetassetsacquired.UnderGAAP,goodwillisnotamortizedforfinancialreportingpurposesandwillhavenoeffectonnetincome,unlessthegoodwillisdeemedtobeimpaired.Ifgoodwillisimpaired,alosswillberecognized.
5Abargainpurchaseoccurswhentheacquisitionpriceislessthanthefairvalueoftheidentifiablenetassetsacquired.Theacquirerrecordsthegainfromabargainpurchaseasanordinarygainduringtheperiodoftheacquisition.Thegainequalsthedifferencebetweentheinvestmentcostandthefairvalueoftheidentifiablenetassetsacquired.
SOLUTIONSTOEXERCISES
SolutionE1-1
1a
2b
3a
4d
SolutionE1-2[AICPAadapted]
1a
Plantandequipmentshouldberecordedatthe$220,000fairvalue.
2c
Investmentcost
$1,600,000
Less:
Fairvalueofnetassets
Cash
$160,000
Inventory
380,000
Propertyandequipment—net
1,120,000
Liabilities
（360,000）
1,300,000
Goodwill
$300,000
SolutionE1-3
Stockholders’equity—PalCorporationonJanuary2
Capitalstock,$10par,600,000sharesoutstanding
$6,000,000
Otherpaid-incapital
[$400,000+$3,000,000–$10,000]
3,390,000
Retainedearnings[$1,200,000-$20,000]
1,180,000
Totalstockholders’equity
$10,570,000
Entrytorecordcombination
InvestmentinSip
6,000,000
Capitalstock,$10par
3,000,000
Otherpaid-incapital
3,000,000
Investmentexpense
20,000
Otherpaid-incapital
10,000
Cash
30,000
Check:
Netassetsperbooks（bookvalue）
$7,600,000
Goodwillandwrite-upassets
3,000,000
Less:
Expenseofdirectcosts
（20,000）
Less:
Issuanceofstock
（10,000）
$10,570,000
SolutionE1-4
JournalentriesonPan’sbookstorecordtheacquisition
InvestmentinSet
10,200,000
Commonstock,$10par
4,800,000
Additionalpaid-incapital
5,400,000
Torecordissuanceof480,000sharesof$10parcommonstockwithafairvalueof$10,200,000forthecommonstockofSetinabusinesscombination.
Additionalpaid-incapital
60,000
Investmentexpenses
100,000
Salaryandoverheadexpenses
80,000
Otherassetsorcash
240,000
Torecordcostsofregisteringandissuingsecuritiesasareductionofpaid-incapital,andrecorddirectandindirectcostsofcombinationasexpenses.
Currentassets
4,400,000
Plantassets
8,800,000
Liabilities
1,200,000
InvestmentinSet
Gainfrombargainpurchase
10,200,000
1,800,000
Torecordallocationofthe$10,200,000costofSetCompanytoidentifiableassetsandliabilitiesaccordingtotheirfairvaluesandthegainfromthebargainpurchase.Thegainfrombargainpurchaseiscomputedasfollows:
Cost
$10,200,000
Fairvalueofnetassetsacquired
12,000,000
Bargainpurchaseamount
$1,800,000
SolutionE1-5
JournalentriesonthebooksofPanCorporationtorecordmergerwithSisCorporation
InvestmentinSis
1,060,000
Commonstock,$10par
360,000
Additionalpaid-incapital
300,000
Cash
400,000
Torecordissuanceof36,000commonsharesandpaymentofcashintheacquisitionofSisCorporationinamerger.
Investmentexpenses
140,000
Additionalpaid-incapital
60,000
Cash
200,000
Torecordcostsofregisteringandissuingsecuritiesandadditional
directcostsofcombination.
Cash
80,000
Inventories
200,000
Othercurrentassets
40,000
Plantassets—net
560,000
Goodwill
320,000
Currentliabilities
60,000
Otherliabilities
80,000
InvestmentinSis
1,060,000
Torecordallocationofcosttoassetsreceivedandliabilitiesassumedonthebasisoftheirfairvaluesandtogoodwillcomputedasfollows:
Costofinvestment
$1,060,000
Fairvalueofnetassetsacquired
740,000
Goodwill
$320,000
SOLUTIONSTOPROBLEMS
SolutionP1-1
Preliminarycomputations
FairValue:
CostofinvestmentinSanatJanuary2
（60,000shares$40）
$2,400,000
Bookvalueofnetassets（$2,000,000-$240,000）
（1,760,000）
Excessfairvalueoverbookvalue
$640,000
Excessassignedto:
Currentassets
$160,000
Remaindertogoodwill
480,000
Excessfairvalueoverbookvalue
$640,000
Note:
$100,000directcostsofcombinationareexpensed.The
excessfairvalueofPin’sbuildingsisnotconsidered.
PinCorporation
BalanceSheetatJanuary2,2011
Assets
Currentassets
（$520,000+$240,000+$160,000excess-$160,000directcosts）
$760,000
Land（$200,000+$400,000）
600,000
Buildings—net（$1,200,000+$400,000）
1,600,000
Equipment—net（$880,000+$960,000）
1,840,000
Goodwill
480,000
Totalassets
$5,280,000
LiabilitiesandStockholders’Equity
Currentliabilities（$200,000+$240,000）
$440,000
Capitalstock,$10par（$2,000,000+$600,000newissue）
2,600,000
Additionalpaid-incapital
[$200,000+（$3060,000shares）—$60,000costsofissuing
andregisteringsecurities]
1,940,000
Retainedearnings（subtract$100,000expenseddirectcost）
300,000
Totalliabilitiesandstockholders’equity
$5,280,000
SolutionP1-2
Preliminarycomputations
FairValue:
CostofacquiringSea
$1,650,000
Fairvalueofassetsacquiredandliabilitiesassumed
1,340,000
GoodwillfromacquisitionofSea
$310,000
PetCorporation
BalanceSheet
atJanuary2,2011
Assets
Currentassets
Cash[$300,000+$60,000-$280,000expensespaid]
$80,000
Accountsreceivable—net[$460,000+$80,000fairvalue]
540,000
Inventories[$1,040,000+$240,000fairvalue]
1,280,000
Plantassets
Land[$800,000+$300,000fairvalue]
1,100,000
Buildings—net[$2,000,000+$600,000fairvalue]
2,600,000
Equipment—net[$1,000,000+$500,000fairvalue]
1,500,000
Goodwill
310,000
Totalassets
$7,410,000
LiabilitiesandStockholders’Equity
Liabilities
Accountspayable[$600,000+$80,000]
$680,000
Notepayable[$1,200,000+$360,000fairvalue]
1,560,000
Stockholders’equity
Capitalstock,$10par[$1,600,000+（66,000shares$10）]
2,260,000
Otherpaid-incapital
[$1,200,000-$80,000+（$1,650,000-$660,000）]
2,110,000
Retainedearnings（subtract$200,000expenseddirectcosts）
800,000
Totalliabilitiesandstockholders’equity
$7,410,000
SolutionP1-3
Parissues25,000sharesofstockforSin’soutstandingshares
1a
InvestmentinSin
1,500,000
Capitalstock,$10par
250,000
Additionalpaid-incapital
1,250,000
Torecordissuanceof25,000,$10parshareswithamarketpriceof$60pershareinabusinesscombinationwithSin.
Investmentexpenses
60,000
Additionalpaid-incapital
40,000
Cash
100,000
TorecordcostsofcombinationinabusinesscombinationwithSin.
Cash
20,000
Inventories
120,000
Othercurrentassets
200,000
Land
200,000
Plantandequipment—net
700,000
Goodwill
360,000
Liabilities
100,000
InvestmentinSin
1,500,000
Toassigninvestmentcosttoidentifiableassetsandliabilitiesaccordingtotheirfairvaluesandtheremaindertogoodwill.Goodwilliscomputed:
$1,500,000cost-$1,140,000fairvalueofnetassetsacquired.
1b
ParCorporation
BalanceSheet
January2,2011
（afterbusinesscombination）
Assets
Cash[$240,000+$20,000-$100,000]
$160,000
Inventories[$100,000+$120,000]
220,000
Othercurrentassets[$200,000+$200,000]
400,000
Land[$160,000+$200,000]
360,000
Plantandequipment—net[$1,300,000+$700,000]
2,000,000
Goodwill
360,000
Totalassets
$3,500,000
LiabilitiesandStockholders’Equity
Liabilities[$400,000+$100,000]
$500,000
Capitalstock,$10par[$1,000,000+$250,000]
1,250,000
Additionalpaid-incapital[$400,000+
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