BUSINESS COMBINATIONS

Copyright © 2015 Pearson Education, Inc .1-1 Chapter 1

BUSINESS COMBINATIONS

Answers to Questions

• A business combination is a union of business entities in which two or more previously separate and

independent companies are brought under the control of a single management team. Three situations establish the control necessary for a business combination, namely, when one or more corporations become subsidiaries, when one company transfers its net assets to another, and when each combining company transfers its net assets to a newly formed corporation.

• The dissolution of all but one of the separate legal entities is not necessary for a business combination. An

example of one form of business combination in which the separate legal entities are not dissolved is when one corporation becomes a subsidiary of another. In the case of a parent-subsidiary relationship, each combining company continues to exist as a separate legal entity even though both companies are under the control of a single management team.

• A business combination occurs when two or more previously separate and independent companies are

brought under the control of a single management team. Merger and consolidation in a generic sense are frequently used as synonyms for the term business combination. In a technical sense, however, a merger is a type of business combination in which all but one of the combining entities are dissolved and a consolidation is a type of business combination in which a new corporation is formed to take over the assets of two or more previously separate companies and all of the combining companies are dissolved.

• Goodwill arises in a business combination accounted for under the acquisition method when the cost of the

investment (fair value of the consideration transferred) exceeds the fair value of identifiable net assets acquired. Under GAAP, goodwill is not amortized for financial reporting purposes and will have no effect on net income, unless the goodwill is deemed to be impaired. If goodwill is impaired, a loss will be recognized.

• A bargain purchase occurs when the acquisition price is less than the fair value of the identifiable net assets

acquired. The acquirer records the gain from a bargain purchase as an ordinary gain during the period of the acquisition. The gain equals the difference between the investment cost and the fair value of the identifiable net assets acquired.Advanced Accounting 12e Floyd Beams Joseph Anthony Bruce Kenneth Smith (Solutions Manual All Chapters, 100% Original Verified, A+ Grade) 1 / 4

1-2Business Combinations Copyright © 2015 Pearson Education, Inc.

SOLUTIONS TO EXERCISES

Solution E1-1

• a
• b
• a
• c

Solution E1-2 [AICPA adapted]

• a

Plant and equipment should be recorded at the $ 220,000 fair value.

• c

Investment cost $1,600,000

Less: Fair value of net assets

Cash $ 160,000 Inventory 380,000 Property and equipment — net 1,120,000 Liabilities (360,000) 1,300,000 Goodwill $ 300,000 Solution E1-3 Stockholders’ equity — Pal Corporation on January 2 Capital stock, $10 par, 1,200,000 shares outstanding $

12,000,000

[$6,000,000 + $6,000,000]

Other paid-in capital

[$800,000 + $6,000,000 – $20,000] 6,780,000

Retained earnings [$2,400,000 - $40,000] 2,360,000 Total stockholders’ equity $21,140,000 Entry to record combination Investment in Sip 12,000,000 Capital stock, $10 par 6,000,000 Other paid-in capital 6,000,000 Investment expense 40,000 Other paid-in capital 20,000 Cash 60,000

Check: Net assets per books (book value) $15,200,000

Goodwill and write-up of assets 6,000,000

Less: Expense of direct costs

(40,000)

Less: Issuance of stock

(20,000)

$21,140,000 2 / 4

Chapter 1 1-3

Copyright ©2015 Pearson Education, Inc.Solution E1-4

Journal entries on Pan’s books to record the acquisition

Investment in Set 20,400,000 Common stock, $10 par 9,600,000 Additional paid-in capital 10,800,000 To record issuance of 960,000 shares of $10 par common stock with a fair value of $20,400,000 for the common stock of Set in a business combination.

Additional paid-in capital 120,000 Investment expenses 360,000 Other assets (or Cash) 480,000 To record costs of registering and issuing securities as a reduction of paid- in capital, and record direct and indirect costs of combination as expenses.

Current assets 8,800,000 Plant assets 17,600,000 Liabilities 2,400,000 Investment in Set 20,400,000 Gain from bargain purchase 3,600,000 To record allocation of the $ 20,400,000 cost of Set Company to identifiable assets and liabilities according to their fair values, and the gain

from the bargain purchase, computed as follows:

Cost $20,400,000 Fair value of net assets acquired 24,000,000 Bargain purchase amount $ 3,600,000

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1-4 Business Combinations

Copyright © 2015 Pearson Education, Inc.Solution E1-5

Journal entries on the books of Pan Corporation to record merger with Sis Corporation

Investment in Sis 1,060,000 Common stock, $10 par 360,000 Additional paid-in capital 300,000 Cash 400,000 To record issuance of 36,000 common shares and payment of cash in the acquisition of Sis Corporation in a merger.

Investment expenses 140,000 Additional paid-in capital 60,000 Cash 200,000 To record costs of registering and issuing securities and additional direct costs of combination.

Cash 80,000 Inventories 200,000 Other current assets 40,000 Plant assets — net 560,000 Goodwill 320,000 Current liabilities 60,000 Other liabilities 80,000 Investment in Sis 1,060,000 To record allocation of cost to assets received and liabilities assumed

on the basis of their fair values and to goodwill computed as follows:

Cost of investment $1,060,000 Fair value of net assets acquired 740,000 Goodwill $ 320,000

• / 4