UNDERSTANDING THE ISSUES

1–1 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 1

UNDERSTANDING THE ISSUES

1.(a) Product extension—manufacturer ex- pands product lines in boating industry.(b) Vertical forward—manufacturer buy s distribution ou tlets (c) Conglomerate—unrelated businesse s (d) Vertical backward—manufacturer ac- quires a supp lier (e) Vertical forward—an entertainment company acquires outlets for its prod- ucts (f) Market extension—companies provid- ing the same services expand thei r geographic ma rket 2.By accepting cash in exchange for the net assets of the company, the seller would have to recognize an immediate taxable gain. However, if the seller were to accept common stock of another corporation in- stead, the seller could construct the trans- action as a tax-free reorganization.The seller could then account for the transa ction as a tax-free exchange. The seller would not pay taxes until the shares re ceived were so ld.

3.Identifiable assets (fair value) .. $600,000 Deferred tax liability

($200,000 × 40%) .................. (80,000

) Net assets ................................ $520,000 Goodwill Price paid ................................. $850,000 Net assets ................................ (520,000 ) Goodwill ................................... $330,000 4.(a) The net assets and goodwill will be recorded at their full fair value on the books of the parent on the date of ac-quisition.(b)An investment account is recorded at the price paid for the intere st.

5.Puncho will record the net assets at their fair value of $800,000 on its books. Also, Puncho will record goodwill of $100,000 ($900,000 – $800,000) resulting from the excess of the price paid over the fair value.Semos will record the removal of its net as- sets at their book values. Semos will record a gain on the sale of business of $500,000

($900,000 – $400,000).

6.(a) Value Analysis

:

Price paid ............................... $800,000 Fair value of net assets .......... 520,000

Goodwill .................................. $280,000 Current assets (fair value) ...... $120,000 Land (fair value) ..................... 80,000 Building and equipment (fair value) ............................ 400,000 Customer list (fair value) ........ 20,000 Liabilities (fair value) .............. (100,000) Goodwill .................................. 280,000

Total ....................................... $800,000 (b) Value Analysis

:

Price paid ............................... $450,000 Fair value of net assets .......... 520,000

Gain ........................................ $ (70,000) Current assets (fair value) ...... $120,000 Land (fair value) ..................... 80,000 Building and equipment (fair value) ............................ 400,000 Customer list (fair value) ........ 20,000 Liabilities (fair value) .............. (100,000) Gain ........................................ (70,000 ) Total ....................................... $450,000 7.The 2015 financial statements would be revised as they are included in the 2016–2015 comparative statements. The 2012 statements would be based on the

new values. The adjustments would be:

(a)The equipment and building will be re- stated at $1 80,000 and $550,000 on the comparative 2015 and 2016 bal- ance sh eets.(b) Originally, depreciation on the equip- ment is $40,000 ($200,000/5) per year.It will be recalculated as $36,000 ($180,000/5) per year. The adjustment for 2015 is for a half year. 2015 depre- ciation expense and accumulated de- preciation will be restated at $18,000 instead of $20,000 for the half year.Depreciation expense for 2016 will be

$36,00

0.Advanced Accounting, 12e Paul Fischer William Taylor Rita Cheng (Solutions Manual All Chapters, 100% Original Verified, A

• Grade) 1 / 4

1–2 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.(c)Originally, depreciation on the buildin g is $25,000 ($500,000/20) per year.It will be recalculated as $27,500 ($550,000/20) per year. The adjust- ment for 2015 is for a half year. 2015 depreciation expense and accumulated depreciation will be restated at $13,750 instead of $12,500 for the half year.Depreciation expense for 2016 will be

$27,50

0.(d) Goodwill is reduced $30,000 on the comparative 2015 and 2016 balance sheets.

8.Fair value of operating unit ...... $1,200,000 Book value including goodwill .. 1,250,000 Goodwill is impaired.Fair value of operating unit ...... $1,200,000 Fair value of net identifiable assets (excluding goodwill) ... 1,120,000

Recalculated goodwill .............. $ 80,000 Existing goodwill ...................... 200,000 Goodwill impairment loss ......... $ 120,000 9.(a) An estimated liability should have been recorded on the purchase date. Any dif- ference between that estimate and the $100,000 paid would be recorded as a gain or loss on the liability already recorded.(b

• The estimated amount due would be

recorded as a part of the purchase price and would result to a credit to paid- in capital, contingent share agreem ent.There would be no re-estimation of the amount.(c) Sin ce this agreement is based on is- suance of additional shares based on a decrease in value, it is recorded as a liability based on the estimated value.On each reporting date, the liability would be re-estimated. Upon the set- tlement date, the liability would be ex- tinguished by the issuance of the addi- tional shares.

10.The two major differences are:

(a)Goodwill is $100,000. Under U.S.GAAP it would be impairment test ed and possibly reduced in future periods.Under IFRS, it would be amortized over some number of future periods.(b)Under U.S. GAAP, the stock iss ue costs would reduce the amount cre- dited to paid in capital. Under IFRS, the issue costs would be expensed in th e period incurred

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1–3 Ch. 1—Exercises © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

EXERCISES

EXERCISE 1-1

(1) Current Assets .......................................................................... 85,000 Land .......................................................................................... 90,000 Building ..................................................................................... 300,000 Equipment ................................................................................ 275,000 Goodwill .................................................................................... 227,000 Liabilities .............................................................................. 102,000 Cash ..................................................................................... 875,000

Expenses (acquisition costs) .................................................... 15,000 Cash ..................................................................................... 15,000

(2) Cash ......................................................................................... 875,000 Liabilities ................................................................................... 100,000 Accumulated Depreciation—Building ....................................... 200,000 Accumulated Depreciation—Equipment ................................... 100,000 Current Assets ..................................................................... 80,000 Land ..................................................................................... 70,000 Building ................................................................................ 450,000 Equipment ............................................................................ 300,000 Gain on Sale of Business ..................................................... 375,000

Note: Seller does not receive the acquisition costs.

(3) Investment in Crown Company ................................................ 875,000 Cash ................................................................................... 875,000 Expenses (acquisition costs) .................................................... 15,000 Cash ................................................................................... 15,000

Note: At year-end, Crown would be consolidated with Barstow, as will be explained in Chapter 2.

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Ch. 1—Exercises 1–4 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

EXERCISE 1-2

Cash ................................................................................................. 100,000 Inventory .......................................................................................... 270,000 Equipment ........................................................................................ 220,000 Land ................................................................................................. 180,000 Buildings .......................................................................................... 300,000 Goodwill* .......................................................................................... 515,000 Discount on Bonds Payable ............................................................. 75,000 Current Liabilities ....................................................................... 80,000 Bonds Payable ........................................................................... 500,000 Common Stock ........................................................................... 60,000 Paid-In Capital in Excess of Par ................................................. 1,020,000

Acquisition Expense ......................................................................... 25,000 Paid-In Capital in Excess of Par ...................................................... 10,000 Cash ........................................................................................... 35,000

*Total consideration:

Common stock (60,000 shares × $18) ....................................... $1,080,000

Less fair value of net assets acquired:

Cash ..................................................................................... $100,000 Inventory .............................................................................. 270,000 Equipment ........................................................................... 220,000 Land ..................................................................................... 180,000 Buildings ............................................................................... 300,000 Current liabilities ................................................................... (80,000) Bonds payable ..................................................................... (425,000 ) Value of net identifiable assets acquired .............................. 565,000 Excess of total cost over fair value of net assets (goodwill) ............. $ 515,000

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