CHAPTER 1 INTERCORPORATE ACQUISITIONS AND INVESTMENTS IN OTHER ENTITIES SOLUTIONS TO EXERCISES E1-1 Multiple-Choice Questions on Complex Organizations 1. b 2. d 3. a 4. b 5.

E1-2 Multiple-Choice Questions on Recording Business Combinations [AICPA Adapted] 1. a 2. c 3. d 4. d 5. c

E1-3 Multiple-Choice Questions on Reported Balances [AICPA Adapted] 1. d 2. d 3. c 4. c

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E1-4 Multiple-Choice Questions Involving Account Balances 1. c 2. c 3. b 4. b 5. b

E1-5 Asset Transfer to Subsidiary a. Journal entry recorded by Pale Company for transfer of assets to Bright Company: Investment in Bright Company Common Stock Accumulated Depreciation Buildings Accumulated Depreciation Equipment Cash Inventory Land Buildings Equipment 408,000 24,000 36,000

21,000 37,000 80,000 240,000 90,000

b. Journal entry recorded by Bright Company for receipt of assets from Pale Company: Cash Inventory Land Buildings Equipment Accumulated Depreciation Buildings Accumulated Depreciation Equipment Common Stock Additional Paid-In Capital 21,000 37,000 80,000 240,000 90,000

24,000 36,000 60,000 348,000

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E1-6 Creation of New Subsidiary a. Journal entry recorded by Lester Company for transfer of assets to Mumby Corporation: Investment in Mumby Corporation Common Stock Allowance for Uncollectible Accounts Receivable Accumulated Depreciation Buildings Accumulated Depreciation Equipment Cash Accounts Receivable Inventory Land Buildings Equipment 498,000 7,000 35,000 60,000

40,000 75,000 50,000 35,000 160,000 240,000

b. Journal entry recorded by Mumby Corporation for receipt of assets from Lester Company: Cash Accounts Receivable Inventory Land Buildings Equipment Allowance for Uncollectible Accounts Receivable Accumulated Depreciation Buildings Accumulated Depreciation Equipment Common Stock Additional Paid-In Capital 40,000 75,000 50,000 35,000 160,000 240,000 7,000 35,000 60,000 120,000 378,000

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E1-7 Balance Sheet Totals of Parent Company a. Journal entry recorded by Foster Corporation for transfer of assets and accounts payable to Kline Company: Investment in Kline Company Common Stock Accumulated Depreciation Accounts Payable Cash Accounts Receivable Inventory Land Depreciable Assets 66,000 28,000 22,000

15,000 24,000 9,000 3,000 65,000

b. Journal entry recorded by Kline Company for receipt of assets and accounts payable from Foster Corporation: Cash Accounts Receivable Inventory Land Depreciable Assets Accumulated Depreciation Accounts Payable Common Stock Additional Paid-In Capital 15,000 24,000 9,000 3,000 65,000

28,000 22,000 48,000 18,000

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E1-8 Creation of Partnership a. Journal entry recorded by Glover Corporation for transfer of assets to G&R Partnership: Investment in G&R Partnership Accumulated Depreciation Buildings Accumulated Depreciation Equipment Cash Accounts Receivable Inventory Land Buildings Equipment 450,000 60,000 40,000

10,000 19,000 35,000 16,000 260,000 210,000

b. Journal entry recorded by Renfro Company for the transfer of cash to G&R Partnership: Investment in G&R Partnership Cash 50,000 50,000

c. Journal entry recorded by G&R Partnership for receipt of assets from Glover Corporation and Renfro Company: Cash Accounts Receivable Inventory Land Buildings Equipment Accumulated Depreciation Buildings Accumulated Depreciation Equipment Capital, Glover Corporation Capital, Renfro Company 60,000 19,000 35,000 16,000 260,000 210,000

60,000 40,000 450,000 50,000

E1-9 Acquisition of Net Assets Sun Corporation will record the following journal entries: (1) Assets Goodwill Liabilities Cash Merger Expense Cash 71,000 9,000

20,000 60,000 4,000

(2)

4,000

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E1-10 Reporting Goodwill a. Goodwill: $120,000 = $310,000 - $190,000 Investment: $310,000 b. Goodwill: $6,000 = $196,000 - $190,000 Investment: $196,000 c. Goodwill: $0; no goodwill is recorded when the purchase price is below the fair value of the net identifiable assets. Investment: $190,000; recorded at the fair value of the net identifiable assets.

E1-11 Stock Acquisition Journal entry to record the purchase of Tippy Inc., shares: Investment in Tippy Inc., Common Stock Common Stock Additional Paid-In Capital $986,000 = $58 x 17,000 shares $425,000 = $25 x 17,000 shares $561,000 = ($58 - $25) x 17,000 shares 986,000 425,000 561,000

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E1-12 Balances Reported Following Combination a. Stock Outstanding: $200,000 + ($10 x 8,000 shares) b. Cash and Receivables: $150,000 + $40,000 c. Land: $100,000 + $85,000 $280,000 190,000 185,000 530,000 45,000 340,000 330,000

d. Buildings and Equipment (net): $300,000 + $230,000 e. Goodwill: ($50 x 8,000) - $355,000 f. Additional Paid-In Capital: $20,000 + [($50 - $10) x 8,000]

g. Retained Earnings

E1-13 Goodwill Recognition Journal entry to record acquisition of Spur Corporation net assets: Cash and Receivables Inventory Land Plant and Equipment Patent Goodwill Accounts Payable Cash Computation of goodwill Fair value of consideration given Fair value of assets acquired Fair value of liabilities assumed Fair value of net assets acquired Goodwill $700,000 (85,000) $670,000 615,000 $ 55,000 40,000 150,000 30,000 350,000 130,000 55,000

85,000 670,000

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E1-14 Acquisition Using Debentures Journal entry to record acquisition of Sorden Company net assets: Cash and Receivables Inventory Land Plant and Equipment Discount on Bonds Payable Goodwill Accounts Payable Bonds Payable Computation of goodwill Fair value of consideration given Fair value of assets acquired Fair value of liabilities assumed Fair value of net assets acquired Goodwill $650,000 (50,000) $608,000 600,000 $ 8,000 50,000 200,000 100,000 300,000 17,000 8,000

50,000 625,000

E1-15 Bargain Purchase Journal entry to record acquisition of Sorden Company net assets: Cash and Receivables Inventory Land Plant and Equipment Discount on Bonds Payable Accounts Payable Bonds Payable Gain on Bargain Purchase of Subsidiary 50,000 200,000 100,000 300,000 16,000

50,000 580,000 36,000

The gain represents the excess of the $600,000 fair value of the net assets acquired ($650,000 - $50,000) over the $564,000 paid to purchase ownership.

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E1-16 Impairment of Goodwill a. Goodwill of $80,000 will be reported. The fair value of the reporting unit ($340,000) is greater than the carrying amount of the investment ($290,000) and the goodwill does not need to be tested for impairment. b. Goodwill of $35,000 will be reported (fair value of reporting unit of $280,000 - fair value of net assets of $245,000). An impairment loss of $45,000 ($80,000 - $35,000) will be recognized. c. Goodwill of $15,000 will be reported (fair value of reporting unit of $260,000 - fair value of net assets of $245,000). An impairment loss of $65,000 ($80,000 - $15,000) will be recognized.

E1-17 Assignment of Goodwill a. No impairment loss will be recognized. The fair value of the reporting unit ($530,000) is greater than the carrying value of the investment ($500,000) and goodwill does not need to be tested for impairment. b. An impairment of goodwill of $15,000 will be recognized. The implied value of goodwill is $45,000 ($485,000 - $440,000), which represents a $15,000 decrease from the original $60,000. c. An impairment of goodwill of $50,000 will be recognized. The implied value of goodwill is $10,000 ($450,000 - $440,000), which represents a $50,000 decrease from the original $60,000. E1-18 Goodwill Assigned to Reporting Units Goodwill of $158,000 ($60,000 + $48,000 + $0 + $50,000) should be reported, computed as follows: Reporting Unit A: Goodwill of $60,000 should be reported. The implied value of goodwill is $90,000 ($690,000 - $600,000) and the carrying amount of goodwill is $60,000. Reporting Unit B: Goodwill of $48,000 should be reported. The fair value of the reporting unit ($335,000) is greater than the carrying value of the investment ($330,000). Reporting Unit C: No goodwill should be reported. The fair value of the net assets ($400,000) exceeds the fair value of the reporting unit ($370,000). Reporting Unit D: Goodwill of $50,000 should be reported. The fair value of the reporting unit ($585,000) is greater than the carrying value of the investment ($520,000).

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E1-19 Goodwill Measurement a. Goodwill of $150,000 will be reported. The fair value of the reporting unit ($580,000) is greater than the carrying value of the investment ($550,000) and goodwill does not need to be tested for impairment. b. Goodwill of $50,000 will be reported. The implied value of goodwill is $50,000 (fair value of reporting unit of $540,000 - fair value of net assets of $490,000). Thus, an impairment of goodwill of $100,000 ($150,000 - $50,000) must be recognized. c. Goodwill of $10,000 will be reported. The implied value of goodwill is $10,000 (fair value of reporting unit of $500,000 - fair value of net assets of $490,000). Thus, an impairment loss of $140,000 ($150,000 - $10,000) must be recognized. d. No goodwill will be reported. The fair value of the net assets ($490,000) exceeds the fair value of the reporting unit ($460,000). Thus, the implied value of goodwill is $0 and an impairment loss of $150,000 ($150,000 - $0) must be recognized. E1-20 Computation of Fair Value Amount paid Book value of assets Book value of liabilities Book value of net assets Adjustment for research and development costs Adjusted book value Fair value of patent rights Goodwill recorded Fair value increment of buildings and equipment Book value of buildings and equipment Fair value of buildings and equipment $624,000 (356,000) $268,000 (40,000) $228,000 120,000 93,000 $517,000

(441,000) $ 76,000 341,000 $417,000

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E1-21 Computation of Shares Issued and Goodwill a. 15,600 shares were issued, computed as follows: Par value of shares outstanding following merger Paid-in capital following merger Total par value and paid-in capital Par value of shares outstanding before merger Paid-in capital before merger Increase in par value and paid-in capital Divide by price per share Number of shares issued b. The par value is $7, computed as follows: Increase in par value of shares outstanding ($327,600 - $218,400) Divide by number of shares issued Par value c. Goodwill of $34,000 was recorded, computed as follows: Increase in par value and paid-in capital Fair value of net assets ($476,000 - $120,000) Goodwill E1-22 Combined Balance Sheet $390,000 (356,000) $ 34,000 $327,600 650,800 $978,400 (588,400) $390,000 $25 15,600

$218,400 370,000

$109,200 15,600 $ 7.00

Adam Corporation and Best Company Combined Balance Sheet January 1, 20X2 Cash and Receivables Inventory Buildings and Equipment Less: Accumulated Depreciation Goodwill Computation of goodwill Fair value of compensation given Fair value of net identifiable assets ($490,000 - $85,000) Goodwill $480,000 (405,000) $ 75,000 $ 240,000 460,000 840,000 (250,000) 75,000 $1,365,000 Accounts Payable Notes Payable Common Stock Additional Paid-In Capital Retained Earnings $ 125,000 235,000 244,000 556,000 205,000 $1,365,000

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E1-23 Recording a Business Combination Merger Expense Deferred Stock Issue Costs Cash Cash Accounts Receivable Inventory Land Buildings and Equipment Goodwill (1) Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital (2) Deferred Stock Issue Costs Computation of goodwill Fair value of consideration given (40,000 x $14) Fair value of assets acquired Fair value of liabilities assumed Fair value of net assets acquired Goodwill Computation of additional paid-in capital Number of shares issued Issue price in excess of par value ($14 - $8) Total Less: Deferred stock issue costs Increase in additional paid-in capital 40,000 x $6 $240,000 (29,000) $211,000 $830,000 (300,000) $560,000 (530,000) $ 30,000 54,000 29,000 70,000 110,000 200,000 100,000 350,000 30,000

83,000

195,000 100,000 5,000 320,000 211,000 29,000

E1-24 Reporting Income 20X2: 20X1: Net income Earnings per share Net income Earnings per share = = = = $6,028,000 [$2,500,000 + $3,528,000] $5.48 [$6,028,000 / (1,000,000 + 100,000*)] $4,460,000 [previously reported] $4.46 [$4,460,000 / 1,000,000]

* 100,000 = 200,000 shares x year

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