Chapter 1
Accounting for Mergers and Acquisitions
SUMMARY OF ASSIGNMENT MATERIAL
Item
Topics Covered
Leve
Time
l
Q1.1
Advantages of structuring a business combination
as a stock acquisition rather than a merger.
Low
15-20
Q1.2
Characteristics of 1990's merger movement.
Low
5-10
Q1.3
Distinguishing between the acquiring and
acquired companies.
Mod
5-10
Q1.4
Impact of allocation of purchase premium.
Mod
5-10
Q1.5
Rationale for criteria for identifiable intangibles.
Mod
5-10
Q1.6
Possible rationale for not recognizing goodwill.
High
10-15
Q1.7
Rationale for rules requiring that negative
goodwill be allocated.
Mod
5-10
Q1.8
Accounting for contingency based on security
prices.
Low
10-15
Q1.9
Comparison of amortization versus impairment
approaches.
Mod
5-10
Q1.10
Definition and impact of reporting unit concept.
Mod
5-10
Q1.11
Rationale for composition of combined
stockholders' equity following a pooling.
(appendix)
Mod
10-15
Q1.12
Treatment of retained earnings in a pooling.
(appendix)
Mod
5-10
1-1
SUMMARY OF ASSIGNMENT MATERIAL (cont=d.)
Item
Topics Covered
Leve
Time
l
E1.1
Journal entries to record purchase as merger and
as stock acquisition.
Low
10-15
E1.2
The preparation of a balance sheet after business
combination using alternative combination
structures.
Mod
20-25
E1.3
Understanding a business acquisition transaction.
Low
10-15
E1.4
Preparation of schedule to allocate purchase
premium; negative goodwill requiring two-stage
allocation process.
Mod
20-25
E1.5
Calculation of carrying value of identifiable
assets acquired and liabilities assumed in a
purchase; four different fair value configurations.
Low
10-15
E1.6
Analyses of a two-stage acquisition.
Mod
15-20
E1.7
Entry for acquisition prior to completion of
combination.
Mod
10-15
E1.8
Allocation of purchase premium to identifiable
intangibles and goodwill.
Mod
15-20
E1.9
Postcombination balance sheet effects produced
by new information relating to a preacquisition
contingency.
Mod
15-20
E1.10
Journal entries required upon resolution of
alternative contingent consideration agreements.
Mod
10-20
E1.11
Journal entries to record a merger as purchase and
as pooling of interests. (appendix)
Low
10-15
1-2
SUMMARY OF ASSIGNMENT MATERIAL (cont=d.)
Item
Topics Covered
Leve
Time
l
E1.12
Preparation of acquisition entry under various
alternatives. (appendix)
Low
15-20
P1.1
Journal entries to record a purchase under various
terms.
Mod
50-60
P1.2
Preparation of the balance sheet of the acquiring
firm following business combinations, and
discussion of how the fair value data was used in
each of the transactions.
Mod
25-35
P1.3
Analysis of a business combination.
High
20-30
P1.4
Analysis of a three-company merger.
High
30-40
P1.5
Analysis of purchase premium, identifiable
intangible assets, and goodwill.
High
30-40
P1.6
Business combination before and after SFAS 141
and 142.
Mod
15-20
P1.7
Identification of five business factors that would
give rise to goodwill; calculation of the recorded
goodwill and discussion of the subsequent
treatment and disclosures associated with the
recorded goodwill.(CMA adapted)
Mod
30-40
P1.8
Journal entries to record purchase, and revise
original purchase price allocation when a preacquisition contingency is resolved; negative
goodwill.
Mod
50-60
1-3
SUMMARY OF ASSIGNMENT MATERIAL (cont=d.)
Item
Topics Covered
Leve
Time
l
P1.9
Allocation of goodwill to reporting units and
subsequent impairment testing.
High
40-50
P1.10
Amortization and impairment testing for
identifiable intangible assets and goodwill.
High
30-40
P1.11
Journal entries to record merger under one
purchase and two pooling combination
arrangements. (appendix)
Mod
20-30
P1.12
Preparation of post-combination balance sheet
under both purchase and pooling; evaluation from
investor perspective. (appendix)
Mod
30-40
1-4
CARRYBACK TABLE
The carryback table identifies the assignment items which are new in
this edition and those which are carried over from the seventh edition. For the
latter, the problem number in the seventh edition is shown.
1
New
Problem
Number
Source
New
Problem
Number
Source
New
Problem
Number
Source
Q1.1
Q1.1
E1.1
E1.1
P1.1
P1.1
Q1.2
Q1.2
E1.2
E1.2
P1.2
P1.31
Q1.3
Q1.9
E1.3
E1.41
P1.3
P1.51
Q1.4
new
E1.4
E1.61
P1.4
P1.81
Q1.5
new
E1.5
E1.71
P1.5
new
Q1.6
Q1.12
E1.6
E1.91
P1.6
new
Q1.7
Q1.5
E1.7
new
P1.7
P1.111
Q1.8
Q1.8
E1.8
new
P1.8
P1.10
Q1.9
new
E1.9
E1.11
P1.9
new
Q1.10
new
E1.10
E1.12
P1.10
new
Q1.11
Q1.7
E1.11
E1.3
P1.11
P1.4
Q1.12
Q1.11
E1.12
E1.5
P1.12
P1.121
Revised for requirements of SFAS 141 and 142
Carryforward tables for all chapters, identifying the disposition of seventh
edition assignment items, appear at the beginning of the solutions manual.
1-5
ANSWERS TO QUESTIONS
Q1.1
By structuring a business combination as a stock acquisition, the separate identity of the
acquired company is maintained. It continues to be a separate legal entity and to maintain
its own financial records. This may be advantageous should the acquirer subsequently wish
to resell the company. Also, an acquisition of less than 100 percent ownership can be
accommodated in the form of a stock acquisition, but not in other forms.
Q1.2
In contrast to the conglomerate movement of the 1960's, acquisitions in the 1990's appear to
have a more strategic purpose. Also, many divestitures of unrelated businesses are
occurring, reversing the trend toward diversification. In contrast to the debt-financed
takeover movement of the 1980's, acquisitions in the 1990's are more often financed by
equity.
Q1.3
In a combination recorded as a pooling of interests, it doesn't really matter, since the book
values of the two companies are combined. In a combination recorded as a purchase, the
acquiring company's assets and liabilities are unchanged, while the acquired company's
assets and liabilities are recorded at fair values. In this case, the final result will be affected
according to which company is designated the acquired company.
Q1.4
Allocating purchase premium to previously unrecorded but identifiable intangible
assets gives a better accounting for the price paid to acquire a company.
Purchase price often far exceeds the value of net tangible assets. In the past,
very large percentages of the purchase price were often attributed to goodwill. By
attributing amounts to identifiable intangibles, readers of financial statements can
better understand the nature of the acquisition. Further, most identifiable
intangible (other than those having indefinite life) will be amortized, while goodwill
will not be amortized. Thus, future income measures are affected by attributing
cost to identifiable intangibles rather than goodwill.
1-6
Q1.5
Attributing cost to the many intangibles acquired in a business combination is very
difficult. The usual approach to doing so is to estimate the stand-alone value of
the particular intangible. Such estimates are reasonably possible for those
intangibles that are capable of being sold (Aseparable@), as one could estimate
the prospective sales price. Such estimates are also reasonably possible for
those intangibles that derive from legal and contractual rights, as one could
estimate the value of having that legal/contractual right versus not having it. It
would be much more difficult to estimate a stand-alone value for intangibles that
have neither of these characteristics. Thus, these criteria were established to
require allocation of acquisition cost to those intangibles that can reasonably be
valued separately, and to not require allocation to those intangibles where such
valuation is difficult.
Q1.6
An asset signifies something that has future value to the firm. Thus, goodwill should
represent values such as brand names, customer base, experienced workforce, etc. It is
possible, especially in a merger following a "bidding war," that the price paid to acquire a
firm is too high, exceeding its value. If so, recording the excess purchase price as an asset
would be inappropriate. However, we have no reliable ways of measuring firm value, so
excessive goodwill cannot be readily detected.
Q1.7
Negative goodwill arises because of a disagreement between the fair values of identifiable
assets and liabilities acquired and the investment cost. The Board decided to allocate the
difference among those assets having the most subjective fair value estimates. The fair
values of current assets, current liabilities, noncurrent liabilities and long-term investments
in marketable securities are generally susceptible to objective measurement. This leaves
other non-current assets, such as plant assets and identifiable intangibles, whose fair values
are often highly uncertain, to be the "dumping ground" for negative goodwill.
1-7
Q1.8
A rise in interest rates is the most likely explanation for the decline in the market value of
the bonds. The bonds originally issued are now worth less and, if the combination has
occurred at the end of the contingency period, the original issue of debt would have been
inadequate. More bonds having sufficient current market value to restore (not improve) the
economic position of the acquired company's former shareholders must now be issued. The
par value of the new bonds issued represents a discount on the entire bond issue which will
be amortized over the remaining life of the bonds. A debit to Discount on Bonds Payable
and a credit to Bonds Payable for the par value of the new debt on the books of the
acquiring company will achieve this result. This has the effect of reducing both the old and
new bonds issued to their current value at the date the contingency is resolved, an amount
equal to the original cost of the acquired company. We conclude that this accounting
treatment is sound.
Q1.9
Periodic amortization allocates the cost of a long-lived asset, less any expected
residual value, systematically over its estimated life, so that some portion of its
cost is deemed to be consumed each year. Under an impairment approach, no
consumption of cost is measured until such time as a marked decline in the future
benefit of the asset occurs. Periodic amortization seems appropriate in cases
where useful life is known to be limited and where asset values generally decline
with age; examples include equipment, vehicles, and patent rights. Impairment
testing seems to be appropriate in cases where useful life can be very long and
where asset values do not necessarily decline with age; examples include
buildings and goodwill.
Q1.10
The reporting unit concept suggests that most companies are made up of a
number of subunits. This feature has long been a part of segment reporting by
companies. Reporting units are defined as subunits that by themselves constitute
a business and have their operating results reviewed by company management;
hence, internally, these units have reporting responsibility. Goodwill arising from a
business combination is deemed to attach to specific business subunits (reporting
units), either newly acquired reporting units or existing reporting units whose
operations are enhanced by the acquisition. Subsequent accounting for goodwill,
in the form of impairment testing, is carried out at the reporting unit level, not at the
total firm level.
1-8
Q1.11 (Appendix)
The pooling concept views a business combination as the union of two
previously independent ownership interests. No new economic resources are
created nor are additional economic costs incurred. After the "union," there is
no reason for combined stockholders' equity to differ from the sum of the
previously separate stockholders' equities in the combining corporations. The
accounting rules are designed to achieve this result. Since the par value of the
stock issued by the "acquiring" company must be recorded, if the "acquired"
company's total contributed capital is more (less) than this par value, the
difference is credited (debited) to additional paid in capital (APIC). The
retained earnings of the acquired company are wholly recorded in the
combination unless a charge to APIC is required which exceeds the balance in
the acquiring company's APIC account. In this case, the excess is debited to
retained earnings. After the pooling, the combined amounts of the individual
stockholders' equity accounts will normally differ from the sums of their
individual balances but total combined stockholders' equity will equal the sum
of the total stockholders' equities of the companies.
Q1.12 (Appendix)
The combining of two previously separate companies can in no way create
additional prior earnings, so an increase in retained earnings could not be
logical. The additional shares issued in a combination, however, could exceed
prior invested capital, thus "capitalizing" some retained earnings. This is
similar to the accounting for a stock dividend, where retained earnings may be
reduced via an increase in the invested capital accounts.
1-9
SOLUTIONS TO EXERCISES
E1.1 RECORDING A MERGER AND A STOCK ACQUISITION
Requirement 1:
Cash and Receivables
Marketable Debt Securities
120,000
150,000
800,000
2,000,000
300,000
Inventory
Plant Assets, net
Goodwill
Long-Term Debt
Current Liabilities
Accrued Pension Liability
850,000
340,000
130,000
2,050,000
Cash
To record the merger with Sack Company as a purchase.
The attorney's fees of $50,000 are reflected in the credit
of cash of $2,050,000 and are part of the cost of the merger.
Requirement 2:
Investment in Sack
2,050,000
Cash
2,050,000
To record acquisition of Sack's shares as a stock
acquisition under the purchase method.
1-10
E1.2 POST-COMBINATION BALANCE SHEET: THREE
ALTERNATIVES
Requirement 1:
Allenhurst Corp.
Post-combination Balance Sheet
May 1, 20X4
Case (a)
Case (b)
Cash
$ 150,000 $ 100,000
Other Current Assets
750,000
600,000
Property Plant & Equipment
1,600,000
1,200,000
Investment in Bensonhurst
-300,000
B
Goodwill
50,000
$2,550,000 $2,200,000
Current Liabilities
$ 400,000 $ 300,000
Long-term Liabilities
850,000
600,000
Common Stock
200,000
200,000
Additional Paid-in Capital
300,000
300,000
Retained Earnings
800,000
800,000
$2,550,000 $2,200,000
Case (c)
$ 150,000
750,000
1,600,000
-50,000
$2,550,000
$ 400,000
850,000
200,000
300,000
800,000
$2,550,000
Requirement 2:
In the stock acquisition case, total assets are unchanged from Allenhurst's precombination balance sheet, reflecting the payment of $300,000 cash and the
acquisition of a $300,000 stock investment. In the merger and asset
acquisition cases, total assets increase by $350,000. Cash of $300,000 was
paid to acquire assets recorded at $650,000 (including $50,000 of goodwill).
Note that $350,000 in liabilities were also recorded, so that there was no
change in Allenhurst's net assets.
1-11
E1.2 (cont=d.)
Requirement 3:
Bensonhurst Corp.
Balance Sheet
May 1, 20X4
$300,000 Common Stock
Additional Paid-in Capital
Retained Earnings
$300,000
Cash
$100,000
50,000
150,000
$300,000
Bensonhurst's only asset is $300,000 cash, received in exchange for all its
previous assets and liabilities. The assets and liabilities sold had a net book
value of $250,000. The $50,000 gain on the sale is reflected in retained
earnings.
E1.3 ACQUISITION OF A BUSINESS
Requirement 1:
This transaction is an asset acquisition; a business unit is being acquired from
Kraft, not a separate company.
Requirement 2:
The major tangible assets acquired by Unilever would be the production and
distribution facilities and probably some inventories. Intangible assets are
likely to be a major factor in this transaction. Unilever acquired two wellknown brand names, plus an existing distribution/customer base that was the
largest in the U.S. In combination with its existing brand names, this would be
expected to give Unilever a significant share of the U.S. ice cream market.
E1.4 ALLOCATION OF PURCHASE PREMIUM
Noncurrent Assets of
Scott Corp.
Fair Value
1-12
Book Value
(FV-BV)
Land
Buildings, net
Equipment, net
Investment in Ace Corp.
$720,000
660,000
180,000
60,000
$1,620,000
$ 240,000
570,000
200,000
70,000
$1,080,000
Negative Goodwill
Total purchase premium
$480,000
90,000
(20,000)
(10,000)
$540,000
(300,000)
$240,000
Negative goodwill must be allocated among noncurrent assets, including
investments accounted for via the equity method, in accordance with their
relative fair values. This is accomplished below, in the second stage of the
two-stage allocation process.
Noncurrent Asset
Land
Buildings, net
Equipment, net
Investment in Ace
Corporation
(1)
Fair Value
Amount
$ 720,000
660,000
180,000
60,000
$1,620,000
(2)
Fair Value
Percent
44.5%
40.7%
11.1%
Allocation of
Neg. Goodwill
(3)
(2)x$300,000
$133,500
122,100
33,300
Recorded
Amount
(1)-(3)
$ 586,500
537,900
146,700
3.7%
100%
11,100
$300,000
48,900
$1,320,000
Note: The above allocations of negative goodwill reflect rounding of the
relative fair value percentage to the nearest tenth of a percent.
1-13
E1.4 (cont=d.)
The following journal entry is made by Paper Company to record the
purchase (not required).
Other Assets
Land
Buildings
Equipment
Investment in Ace Corp.
1,180,000
586,500
537,900
146,700
48,900
Cash
2,500,000
To record the purchase of the net assets of Scott
Corporation for $2,500,000 cash.
E1.5 ALLOCATION OF PURCHASE PREMIUM AND PURCHASE
DISCOUNT
Account
Current Assets
Land
Other Plant Assets
Goodwill
Liabilities
Extraordinary Gain
(1)
Case 1
$600,000
300,000
Case 2
$800,000
350,000(1)
Case 3
$900,000
150,000(2)
Case 4
$1,430,000
---
700,000
200,000
(800,000)
350,000(1)
-(500,000)
450,000(2)
-(500,000)
-(300,000)
--
--
--
(130,000)(3)
Negative goodwill of $100,000 (= $1,100,000 - $1,000,000) is allocated
among Land and Other Plant Assets in accordance with their relative
fair values, as follows:
Noncurrent Asset
Land
Other Plant Assets
(1)
Fair Value
Amount
$ 400,000
400,000
$ 800,000
(2)
Fair Value
Percent
50%
50%
100%
1-14
Allocation of
Neg. Goodwill
(3) (2)x$100,000
$ 50,000
50,000
$100,000
Recorded
Amount
(1)-(3)
$ 350,000
350,000
$700,000
E1.5 (cont=d.)
(2)
Negative goodwill of $200,000 (=$1,200,000-$1,000,000) is allocated
among Land and Other Plant Assets in accordance with their relative
fair values, as follows:
Land: $200,000 - (200/800) $200,000 = $150,000
Other Plant Assets: $600,000 = (600/800) $200,000 = $450,000
(3)
Negative goodwill of $380,000 (=$1,380,000 - $1,000,000) is allocated
to Land and Other Plant Assets, driving their combined fair value of
$250,000 to zero. The resulting unallocated negative goodwill of
$130,000 (=$380,000 - ($50,000 + $200,000)) is reported as an
extraordinary gain in the year of acquisition.
E1.6 TWO-STAGE ACQUISITION
Requirement 1:
Primerica acquired 39.15 million shares (145 million x 27%) for $723 million.
Thus the price per share was about $18.50 (723/39.15).
Requirement 2:
Travelers stockholders will receive .8 Primerica share which is worth $37.60
($47 x .8). Since Travelers is currently trading at $36, the premium is $1.60 or
about 4 percent. Note, however, that Travelers stock appears to have almost
doubled in price over the past year, as the original acquisition was at $18.50,
which was certainly no less than the market price at that time.
Requirement 3:
Cost of initial acquisition
Cost of second acquisition
145 million shares x .73 acquired x $47 value of
Primerica shares exchanged x .8 exchange ratio
E1.7 DATE OF ACQUISITION
1-15
$ 723,000,000
3,980,000,000
$4,703,000,000
Because the acquisition date is designated as a date prior to the completion of
the combination, interest expense must be accrued from the designated
acquisition date to the date of combination.
Interest to be accrued = $20,000,000 X .10 X (25/365) = $136,986
Entries to record acquisition:
Investment in Smith
20,000,000
Cash
To record acquisition of Smith Corporation for cash.
Interest Expense
20,000,000
136,986
Investment in Smith
To accrue interest for 25 days from designated
acquisition date to combination date.
136,986
E1.8 INTANGIBLE ASSETS
Identifiable intangibles are to be recorded in a business combination.
Identifiable intangibles include those arising from contractual and other legal
rights and those which are separable.
Of the eight intangibles listed, four appear to be based on contractual and other
legal rights:
Signed customer contracts
Internet domain name
Office leases
Registered company name and trademark
1-16
$1,000,000
150,000
100,000
60,000
$1,310,000
E1.8 (cont=d.)
One additional item appears to be separable, capable of being sold, licensed, or
otherwise transferred:
Databases of industry data
$ 50,000
The remaining three items appear to be neither based on contractual/legal
rights or separable.
DeLight would account for the $2,000,000 purchase premium by allocating
$1,360,000 to the five identifiable intangibles identified above, and the
remaining $640,000 would be allocated to goodwill.
E1.9 PRE-ACQUISITION CONTINGENCIES
Current Assets
Noncurrent Assets
Goodwill
Monetary Liabilities
Estimated Liability
1/3/X7
$ 850,000
1,600,000
130,000
(500,000)
(280,000)
12/31/X7
$ 850,000
1,600,000
50,000 (1)
(500,000)
(200,000)(1)
12/31/X8
$ 850,000
1,600,000
50,000 (2)
(500,000)
(350,000)(2)
(1)
Since the favorable new information was received within the 12-month
allocation period, the original purchase price allocation is revised with
both the Estimated Liability and Goodwill being reduced by $80,000.
(2)
The latest information which caused the upward revision in the
estimated liability was received in 20X8 after the allocation period
expired. Assuming that the provisions of SFAS 5 relating to loss
contingencies are satisfied, the $150,000 increase in the estimated
liability would be recorded as a loss in 20X8; neither Goodwill nor any
other aspect of the purchase price allocation can be affected by
information relating to preacquisition contingencies received after the
allocation period has ended.
E1.10
CONTINGENT CONSIDERATION
1-17
Case 1:
The earnings contingency provides for additional consideration if the
contingency occurs. Additional consideration, even though payable at a later
date, increases the cost of the investment in Stud's stock. The excess earnings
amount is $76,000 (=$2,076,000-$2,000,000) and 2,000 (=$76,000/$38)
additional shares of Plank stock must be issued. The entry follows.
Investment in Stud
76,000
Common Stock (par value $1)
Additional Paid-in Capital
To record additional consideration required upon resolution
of the earnings contingency.
2,000
74,000
Case 2:
In contrast, resolution of the contingency based on security prices does not
give rise to additional consideration as it simply guarantees the value of the
original shares issued in the acquisition. Market value of the original stock has
declined by $500,000 (=($40-$38) 250,000) and 13,158 (=$500,000/$38)
shares must now be issued.
Additional Paid-in Capital
13,158
Common Stock (par $1)
To record the par value of the shares issued upon
resolution of the contingency based on security prices.
The entry corrects the amount of additional paid-in
capital originally recorded, by reclassifying an amount
equal to the par value of the new shares issued as
Common Stock.
E1.11
13,158
RECORDING A MERGER: PURCHASE vs. POOLING OF
INTERESTS (APPENDIX)
1-18
Requirement 1:
Current Assets
150,000
Property and
Equipment, net
300,000
Liabilities
Common Stock (par $10)
Additional Paid-in Capital
Retained Earnings
To record the merger with Samuel, Inc. as a pooling
of interests.
130,000
30,000
20,000
270,000
Requirement 2:
Current Assets
140,000
Property and
Equipment, net
350,000
Liabilities
Common Stock (par $10)
Additional Paid-in Capital
To record the merger with Samuel, Inc. as a purchase.
A purchase premium of $40,000 (= ($120 x 3,000) ($50,000 + $270,000)) was paid but the excess of
fair value of Samuel's net assets over their book value
was $70,000. Hence there was negative goodwill of
$30,000 (=$70,000 - $40,000) which reduced the
$380,000 fair value of Samuel's plant and equipment
to its recorded value of $350,000.
1-19
130,000
30,000
330,000
E1.12
RECORDING AN ACQUISITION (APPENDIX)
Requirement 1:
Investment in
Underbrush
4,250,000
Common Stock
Additional Paid-In Capital
Cash
2,100,000
2,100,000
50,000
Requirement 2:
Current Assets
Noncurrent Assets
(5,400,000 - 450,000)
1,300,000
4,950,000
Current Liabilities
Noncurrent Liabilities
Common Stock
Additional Paid-In Capital
1,000,000
1,000,000
2,100,000
2,100,000
50,000
Cash
Requirement 3:
Investment in Underbrush
5,000,000
Common Stock
Retained Earnings
Expenses
2,100,000
2,900,000
50,000
Cash
50,000
Requirement 4:
Current Assets
Noncurrent Assets
2,000,000
5,000,000
Current Liabilities
Noncurrent Liabilities
Common Stock
Retained Earnings
Expenses
1,000,000
1,000,000
2,100,000
2,900,000
50,000
Cash
50,000
1-20
SOLUTIONS TO PROBLEMS
P1.1 PURCHASE ENTRIES: STATUTORY MERGER
The following schedule will be used in requirements 1, 2, 3.
Assets and Liabilities
of Steel Corporation
Cash and Receivables
Inventory
L-T Inv. in Mkt. Sec.
Land
Bldgs. and Equip., net
Patents
Liabilities
Fair Value Book Value
$35,000
$35,000
45,000
35,000
20,000
18,000
11,000
8,000
14,000
7,000
10,000
5,000
(22,000)
(22,000)
$113,000
86,000
(FV-BV)
-$10,000
2,000
3,000
7,000
5,000
-$27,000
Allocation
Based on
Plastic's
Interest
(100%)
-$10,000
2,000
3,000
7,000
5,000
-$27,000
Requirement 1:
The total cost of the acquisition is $125,000 (=$100,000 + $25,000), and a
purchase premium of $39,000 (=$125,000 - $86,000) results. We can allocate
$27,000 to identifiable assets so that $12,000 (=$39,000 - $27,000) remains as
goodwill. The journal entry made by Plastic to record the merger appears
below.
1-21
P1.1 (cont=d.)
Books of Plastic Corporation
Cash and Receivables
Inventory
LT Investments in
Marketable Securities
Land
Buildings and Equipment
Patents
Goodwill
35,000
45,000
20,000
11,000
14,000
10,000
12,000
Liabilities
Cash
To record the merger with Steel Corporation,
accounted for as a purchase costing $125,000.
22,000
125,000
Requirement 2:
The total cost of the acquisition is $100,000 (=$90,000 + $10,000) and a
purchase premium of $14,000 (=$100,000 - $86,000) results. Since the excess
of fair value over book value of $27,000 exceeds the purchase premium of
$14,000, negative goodwill of ($13,000) [=$14,000 - $27,000] must be
allocated among the noncurrent assets, except financial assets (long-term
investments in marketable securities), in accordance with their fair values.
This is the second stage of the two-stage allocation process.
1-22
P1.1 (cont=d.)
Noncurrent Asset
Land
Buildings and
Equipment
Patents
Total
(1)
(2)
Fair Value Fair value
Amount
Percent
$11,000
31%
Allocation of
Neg. Goodwill
(3)
(2)x$13,000
$4,030
Recorded
Amount
(1)-(3)
$6,970
14,000
40%
5,200
8,800
10,000
$35,000
29%
100%
3,770
$13,000
6,230
$22,000
We now give the journal entry made by Plastic to record the merger in
requirement 2.
Books of Plastic Corporation
Cash and Receivables
Inventory
LT Investments in
Marketable Securities
Land
Buildings and Equipment
Patents
35,000
45,000
20,000
6,970
8,800
6,230
Liabilities
Cash
To record the merger with Steel Corporation,
accounted for as a purchase costing $100,000.
1-23
22,000
100,000
P1.1 (cont=d.)
Requirement 3:
The total cost of the acquisition is $60,000 (=$50,000 + $10,000), giving a
purchase discount of ($26,000) (= $60,000 - $86,000). Negative goodwill now
amounts to ($53,000) = [=($26,000) - $27,000]. After allocating it to eligible
noncurrent assets, ($18,000) = ($53,000) + $11,000 + $14,000 + $10,000
remains and the carrying values of eligible noncurrent assets are driven to zero.
Therefore, an extraordinary gain of ($18,000) based on negative goodwill
must be recorded as part of the merger in the following journal entry.
Books of Plastic Corporation
Cash and Receivables
Inventory
LT Investments in
Marketable Securities
35,000
45,000
20,000
Liabilities
Cash
Extraordinary Gain
(Unallocated Negative
Goodwill)
To record the merger with Steel Corporation,
accounted for as a purchase costing $60,000.
22,000
60,000
18,000
Requirement 4:
Books of Plastic Corporation
Investment in Steel
105,000
Cash
To record the acquisition of 80 percent of the outstanding
shares of Steel Corporation as a long-term investment.
1-24
105,000
P1.2 IMPACT OF VARIOUS FORMS OF COMBINATION
Requirement 1a:
Current Assets
Property, Plant
&Equipment
Chalmers Inc.
Balance Sheet
October 4, 20X0
$135,000 Current Liabilities
$100,000
545,000 Long-Term Debt
Common Stock
$680,000
380,000
200,000
$680,000
The above solution assumes that Chalmers is a new company
formed by independent investors, and thus Chalmers acquires
both existing companies. Thus, fair values of both acquired
companies were recorded by Chalmers. If Chalmers were
formed by Ashley and Ballston to serve as a vehicle for
acquiring the two companies, SFAS 141 would require that one
of the two combining entities B either Ashley or Ballston B be
designated as the acquiring company. In that case, fair values
would be recorded only for the other (acquired) company.
Requirement 1b:
Current Assets
Property, Plant
&Equipment
Ashley Inc.
Balance Sheet
October 4, 20X0
$115,000 Current Liabilities
$100,000
395,000 Long-Term Debt
Common Stock
Retained Earnings
$510,000
240,000
80,000
90,000
$510,000
1-25
P1.2 (cont=d.)
Requirement 1c:
Current Assets
Property, Plant
&Equipment
Ballston Inc.
Balance Sheet
October 4, 20X0
$110,000 Current Liabilities
$100,000
500,000 Long-Term Debt
Common Stock
Retained Earnings
$610,000
340,000
60,000
110,000
$610,000
Requirement 2:
The statutory consolidation (case 1a) records the fair values of both Ashley and
Ballston, as both companies are acquired by the new company, Chalmers. In
the statutory merger situations (cases 1b and 1c), fair values are recorded only
for the acquired company; net assets of the acquiring company remain at book
value. A reconciliation is provided below.
Book value of Ashley's assets
Book value of Ballston's assets
Fair value adjustments recorded for:
Ashley's assets
Ballston's assets
Post-combination recorded assets
1-26
Case 1a
$240,000
200,000
Case 1b
$240,000
200,000
Case 1c
$240,000
200,000
170,000
70,000
$680,000
B
70,000
$510,000
170,000
B
$610,000
P1.2 (cont=d.)
Requirement 3:
In this situation, it is likely that Chalmers is being formed by the combining
parties. SFAS 141 requires that one of the combining entities be designated the
acquiring company. Both Ashley and Ballston are of equal size in terms of
book value of stockholders= equity, though Ashley is larger in terms of fair
value of net assets. Ashley stockholders also receive the majority interest
(60%) in the new company. Thus, Ashley would likely be designated the
acquiring company.
Current Assets
Property, Plant &
Equipment
Chalmers, Inc.
Balance Sheet
October 4, 20X0
$116,000 Current Liabilities
$100,000
395,000 Common Stock
Retained Earnings
$511,000
321,000
90,000
$511,000
Note: If the initial $1,000 had been provided by one or both of the existing
companies, the resulting balance sheet would show:
Current Assets
Property, Plant &
Equipment
Chalmers, Inc.
Balance Sheet
October 4, 20X0
$115,000 Current Liabilities
$100,000
395,000 Common Stock
Retained Earnings
$510,000
320,000
90,000
$510,000
1-27
P1.3 COMBINATIONS OF WAREHOUSE CLUBS
Requirement 1:
This combination is a statutory consolidation. A new company (Price/Costco)
is being formed, absorbing the two former companies (Price Co. and Costco
Wholesale Corp.).
Requirement 2:
Price shareholders:
46.3 million Price shares x 2.13
exchange ratio =
98,620,000 Price/Costco shares
Costco shareholders:
121 million Costco shares x 1.00
exchange ratio =
121,000,000 Price/Costco shares
Total Price/Costco shares
219,620,000
Price shareholders have 45 percent (98.62/219.62) and Costco shareholders
have 55 percent (121/219.62) of the new company.
Requirement 3:
Considerations in determining the acquiring company include:
1.
It is the larger entity.
In terms of pre-combination market
value, Price had a total market value of $1,493 million (=
46.3 million shares at $32.25 pre-announcement market
price) and Costco had a total market value of $2,057
million (= 121 million shares at $17).
entity by this measure.
1-28
Costco is the larger
2.
Its owners have the larger equity share in the combined
entity. Per the data in the solution to Requirement 2
above, Price shareholders received 45% of Price/Costco (=
98,620,000 of 219,620,000 shares), while Costco
shareholders received 55%.
Costco owners received the
larger equity share.
P1.3 (cont=d.)
3.
Its stockholders did not receive a premium over market
value in the exchange. Price shareholders had 42% of the
initial value (=$1,493 million of $3,550 million total) but
received 45% of the shares of the new company, thus
receiving a premium. Costco shareholders had 58% of the
initial value (=$2,057 million of $3,550 million) but received
only 55% of the shares of the new company.
Costco
owners did not receive a premium.
Requirement 4:
Increase in market value upon announcement:
Price 46.3 million shares x $6.25 (= $38.50 - $32.25)
Costco 121 million shares x $2 (= $19 - $17)
$289,375,000
242,000,000
$531,375,000
The combination of the two companies created a new entity that was expected
1-29
to be much stronger than the two separate entities. They eliminated each other
as a competitor, and achieved a combined size (sales volume and number of
stores) comparable to the industry leader.
Requirement 5:
Wal-Mart paid about $3.3 million per store ($300 million/91 stores) for the
Pace acquisition. The Price/Costco combination transaction had a total dollar
value of about $4.1 billion (shown below) or about $20.4 million per store
($4,082 million/200 stores).
Price 46.3 million shares at $38.50
Costco 121 million shares at $19
Total value
$1,782,550,000
2,299,000,000
$4,081,550,000
1-30
P1.3 (cont=d.)
It would appear that Wal-Mart expanded its capacity at a very favorable price.
Several factors may account for the large difference. Wal-Mart is acquiring
additional store sites, but already has in place an administrative and
distribution system. Thus, its price reflects store site value only. The PriceCostco combination reflects all aspects of business value--store sites,
distribution, and administration, as well as the value of the combined entity
being a much stronger competitor in the market. In addition, Kmart's Pace
stores were not very successful, and thus were probably not able to command
much of a price beyond building value (or the lease value, if Kmart did not
own the building, as is often the case). Thus Wal-Mart was able to buy at
distress-sale prices.
P1.4 MERGER OF THREE COMPANIES
Requirement 1:
Softkey
Spinnaker
WordStar
$244 million x .53 =
$244 million x .31 =
$244 million x .16 =
$129,000,000
76,000,000
39,000,000
$244,000,000
Requirement 2:
Softkey
Spinnaker
WordStar
$129,000,000/$5 =
$ 76,000,000/$1.50 =
$ 39,000,000/$1.25 =
25,800,000 shares
50,667,000 shares
31,200,000 shares
$129,000,000/1.25 =
4 (WordStar) to 1 (Softkey)
$ 76,000,000/1.25 =
1.2 (WordStar) to 1 (Spinnaker)
103,200,000 shares
Requirement 3:
Softkey
Exchange Ratio:
Spinnaker
Exchange Ratio:
1-31
60,800,000 shares
P1.4 (cont=d.)
Requirement 4:
31,200,000 + 103,200,000 + 60,800,000 = 195,200,000 shares
Requirement 5:
1 for 8 ($10/$1.25)
Requirement 6:
The various indicators for determining the acquiring company
give mixed answers:
1.
It issues the equity interests.
WordStar is issuing the
equity interests.
2.
It is the largest entity. As shown in the solution to
Requirement 1, SoftKey has the largest market value.
3.
The combined company bears its name. The new
company will be known as SoftKey.
4.
Its owners have the largest equity interest in the combined
company. SoftKey stockholders receive 53% of the stock
in the new company.
5.
It dominates the senior management of the new company.
Spinnaker provides the location and the bulk of the
executive staff.
6.
Its owners did not receive a premium. Neither SoftKey
nor Spinnaker nor WordStar stockholders appeared to
1-32
receive a premium, as the shares in the new company (53,
31, and 16% respectively) are in exactly the same
proportions as the equity values in the solution to
Requirement 1.
More indicators point to SoftKey as the likely Aacquiring
company.@
The selection matters in that the acquiring company=s book
values will be carried forward, but fair values will be used for
the acquired companies.
1-33
P1.5 IDENTIFIABLE INTANGIBLES AND GOODWILL
Requirement 1:
Cost of acquisition:
Stock issued: 1,000,000 shares @ $35
Professional fees
Total
Book value of net assets acquired
Purchase premium
Assets and
Liabilities of
Squire
Cash
Accounts
Receivable
Parts Inventory
Equipment, net
Intangible:
Lease
Intangible:
Service
Contracts
Intangible:
Trade Name
Current
Liabilities
Long-Term
Liabilities
$35,000,000
1,200,000
$36,200,000
14,100,000
$22,100,000
Fair Value
$ 300,000
Book Value
$ 300,000
Fair Value
less Book
Value
$
0
2,600,000
6,000,000
19,500,000
2,700,000
5,200,000
17,600,000
(100,000)
800,000
1,900,000
2,600,000
6,000,000
19,500,000
1,250,000
0
1,250,000
1,250,000
2,000,000
0
2,000,000
2,000,000
200,000
0
200,000
200,000
(3,100,000)
(3,100,000)
0
(3,100,000)
(8,000,000)
$20,750,000
(8,600,000)
$14,100,000
600,000
$6,650,000
15,450,000
$22,100,000
(8,000,000)
$20,750,000
15,450,000
Goodwill
Total Purchase Premium
Total Cost
Cost
Assigned to
Prince
$ 300,000
$36,200,000
1-34
P1.5 (cont=d.)
Note: The lease, service contracts, and trade name qualify as identifiable
intangibles, as they are based on legal or contractual rights. The work force
does not qualify as an identifiable intangible, as it is neither separable nor
based on legal/contractual rights. Thus the work force value is included as part
of goodwill.
Requirement 2:
Cash
Accounts Receivable
Parts Inventory
Equipment
Intangible: Lease
Intangible: Service
Contracts
Intangible: Trade Name
Goodwill
300,000
2,600,000
6,000,000
19,500,000
1,250,000
2,000,000
200,000
15,450,000
Cash (1)
Current Liabilities
Long-Term Liabilities
Capital Stock, net (2)
To record acquisition of Squire Service Corporation.
1,800,000
3,100,000
8,000,000
34,400,000
Notes:
(1) Cash paid for professional fees ($1,200,000) and registration and issue
costs ($600,000).
(2) Proceeds from stock issue ($35,000,000) less registration and issue costs
($600,000). No par value is specified, so it is not possible to distinguish
common stock at par value from additional paid-in capital.
1-35
P1.6
IDENTIFIABLE INTANGIBLES AND GOODWILL
Had the acquisition occurred after SFAS 141 became effective, it is likely that
some of the $38 million recorded as goodwill would have been assigned to
identifiable intangible assets, resulting in a smaller amount of goodwill. SFAS
141 requires that acquisition cost be assigned to any intangible assets that are
separable, or that are based on legal or contractual rights.
Once SFAS 142 became effective, goodwill is no longer amortized. This
applies not only to goodwill in new acquisitions, but also to goodwill arising
from prior acquisitions, such as Toys R Us=s acquisition of Imaginarium Toy
Centers. Rather than being amortized, goodwill is subject to impairment
review on a regular basis. However, any amounts assigned to identifiable
intangibles would be amortized over the expected life.
P1.7 GOODWILL
Requirement 1:
The following business factors or conditions might give rise to goodwill:
!
!
!
!
!
Well-trained, motivated, and cooperative employees, and superior
management.
Product-related factors such as reputed high quality.
Exclusive processes or formulas.
Loyal customer base.
Favorable or strange location, and good distribution channels.
1-36
P1.7 (cont=d.)
Requirement 2:
The goodwill to be recognized on Lisa Corporation's books is computed
below:
Schedule of Goodwill Calculation
($000's omitted)
Cost of Toga Corporation to Lisa Corporation
$780
Fair market value of the individual assets and liabilities:
Marketable securities
$115
Accounts receivable (net)
40
Inventories
135
Property, plant and equipment
410
Total assets
700
Less: Current liabilities
70
Total fair market value
630
Goodwill
$150
Requirement 3:
Goodwill is recorded as an asset only when acquired from another enterprise
or individual, i.e., Lisa Corporation's purchase of Toga Corporation. The
goodwill was not included on Toga Corporation's Statement of Financial
Position since the cost of developing, maintaining, or restoring intangible
assets that are not specifically identifiable, i.e., goodwill, was expensed as
incurred by Toga Corporation.
1-37
P1.8 NEGATIVE GOODWILL AND PREACQUISITION
CONTINGENCY
Requirement 1:
The estimated liability must be recorded first as it affects the purchase
premium. After the $800,000 liability is booked, the purchase premium is
$400,000 = [$10,000,000 - ($2,000,000 + $8,400,000 - $800,000)]. The
schedule to allocate the purchase premium is shown below and reflects the
estimated liability.
Account
Fair Value
Cash and Receivables
$ 6,400,000
Inventory
5,800,000
Depreciable Plant Assets 6,500,000
Other (Nondepreciable)
Assets
3,000,000
Current Liabilities
(5,000,000)
Estimated Liability
(800,000)
Long-Term Debt
(1,800,000)
$14,100,000
Negative Goodwill
Total Purchase Premium
Total Cost Assigned
Book Value
$6,400,000
3,800,000
4,000,000
Cost Assigned
To Fisher=s
Interest
FV-BV
(100%)
$
-$6,400,000
2,000,000 5,800,000
2,500,000 6,500,000
3,000,000
-3,000,000
(5,000,000)
-(5,000,000)
(800,000)
-(800,000)
(1,800,000)
-(1,800,000)
$9,600,000 $4,500,000 14,100,000
(4,100,000)(4,100,000)
$ 400,000
-$10,000,000
Allocation of Negative Goodwill
The negative goodwill of $4,100,000 must be allocated among Depreciable
Plant Assets and Other (Nondepreciable) Assets in accordance with their
relative fair values, as shown below. (Note: The negative goodwill allocations
here and in part 2 reflect rounding of the relative fair value percentages to the
nearest whole percent.)
1-38
P1.8 (cont=d.)
Account
Depreciable Plant
Assets
Other
(Nondepreciable)
Assets
(1)
Fair Value
Amount
(2)
Fair value
Percent
Allocation of
Neg. Goodwill
(3)
(2)x$4,100,000
$6,500,000
68 %
$2,788,000
$3,712,000
3,000,000
$9,500,000
32
100%
1,312,000
$4,100,000
1,688,000
$5,400,000
Recorded
Amount
(1)-(3)
Books of Fisher Corp.
Cash and Receivables
Inventory
Depreciable Plant Assets
Other (Nondepreciable
Assets)
6,400,000
5,800,000
3,712,000
1,688,000
Current Liabilities
Estimated Liability
Long-Term Debt
Capital Stock
To record the statutory merger with Grant Corp.,
accounted for as a purchase.
5,000,000
800,000
1,800,000
10,000,000
Requirement 2:
Since the preacquisition contingency--the lawsuit--was settled within the
one-year allocation period for $100,000, the original purchase price allocation
must be revised as the estimated liability was overstated by $700,000
(=$800,000 - $100,000). Thus the negative goodwill should be increased to
$4,800,000 and the original allocation of the negative goodwill revised as
follows.
1-39
P1.8 (cont=d.)
Account
Depreciable Plant
Assets
Other
(Nondepreciable)
Assets
(1)
Fair Value
Amount
(2)
Fair value
Percent
Allocation of
Neg. Goodwill
(3)
(2)x$4,800,000
$6,500,000
68 %
$3,264,000
$3,236,000
3,000,000
$9,500,000
32
100%
1,536,000
$4,800,000
1,464,000
$4,700,000
Recorded
Amount
(1)-(3)
Adjusting Entry-Books of Fisher Corp.
Estimated Liability
700,000
Depreciable Plant Assets
Other (Nondepreciable) Assets
To adjust the original purchase price allocation to reflect
resolution of the preacquisition contingency; $476,000 =
$3,712,000 - $3,236,000; $224,000 = $1,688,000 - $1,464,000.
Resolution of the contingency increased the original
negative goodwill and only the accounts to which it is
allocated are affected in the revised purchase price allocation.
1-40
476,000
224,000
P1.9 GOODWILL ALLOCATION AND IMPAIRMENT
Requirement 1:
Identifiable assets acquired
Liabilities assumed
Net identifiable assets acquired
Total acquisition cost
Goodwill
$53,000,000
(19,000,000)
$34,000,000
50,000,000
$16,000,000
Allocation to business units:
Identifiable
assets
acquired
Liabilities
assumed
Net assets
assigned
New Unit X
New Unit Y
New Unit Z
$30,000,000
$16,000,000
$7,000,000
(12,000,000)
(5,000,000)
$18,000,000
$11,000,000
1-41
Total
$53,000,000
(2,000,000) (19,000,000)
$5,000,000
$34,000,000
P1.9 (cont=d.)
Fair value of
reporting unit
Less: Net
assets assigned
Increase in fair
value
Tentative
allocation of
goodwill
Total tentative
allocation is
$20,000,000;
goodwill to be
assigned is
$16,000,000.
20% reduction
Allocation of
goodwill
New Unit X
New Unit Y
New Unit Z
$24,000,000
$15,000,000
$10,000,000
(18,000,000) (11,000,000)
(5,000,000)
Existing
Unit J
$5,000,000
$6,000,000
$4,000,000
$5,000,000
$5,000,000
$(1,200,000)
(800,000)
(1,000,000)
(1,000,000)
$4,800,000
$3,200,000
$4,000,000
$4,000,000
1-42
P1.9 (cont=d.)
Requirement 2:
Step 1 of impairment test: Compare fair value of reporting unit at 12-31-X4 to
carrying amount of unit at that date.
Unit X
Fair value
12-31-X4
Carrying
amount at
12-31-X4
Difference
Preliminary
conclusion
$26,000,000
Unit Y
$12,000,000
25,000,000
13,000,000
$1,000,000 $(1,000,000)
Not impaired
May be
impaired
Unit Z
$5,000,000
Unit J
$63,000,000
7,000,000
65,000,000
$(2,000,0000) $(2,000,000)
May be
May be
impaired
impaired
Step 2 of the impairment test: For those reporting units where goodwill may be
impaired, calculate implied fair value of goodwill at 12-31-X4 and compare to
carrying amount of goodwill at that date.
Fair value of reporting unit
Fair value of identifiable net
assets at 12-31-X4
Implied value of goodwill
Carrying amount of goodwill
Difference
Conclusion
Unit Y
$ 12,000,000
Unit Z
$ 5,000,000
Unit J
$63,000,000
7,000,000
4,000,000
58,000,000
$ 5,000,000 $ 1,000,000 $ 5,000,000
3,200,000
4,000,000
4,000,000
$ 1,800,000 $(3,000,000) $ 1,000,000
Goodwill is
Goodwill is Goodwill is
not impaired
impaired
not impaired
Goodwill is impaired for Reporting Unit Z. A write-off of goodwill in the
amount of $3,000,000 should be recorded at December 31, 20X4.
1-43
P1.10
INTANGIBLE ASSETS AND GOODWILL
First, consider whether any of the intangible assets are impaired.
Original carrying amount
Less: amortization
20X1
20X2
20X3
Carrying amount at 12/31/X3
Intangible A
$ 500,000
Intangible B
$ 800,000
Intangible C
$ 1,300,000
(100,000)
(100,000)
(100,000)
$ 200,000
(80,000)
(80,000)
(80,000)
$ 560,000
C
C
C
$ 1,300,000
Note that Intangible C has an indefinite life and thus is not amortized.
Step 1 of impairment test: To determine whether an impairment has occurred,
compare the undiscounted future cash flows from the asset to its carrying
value.
Undiscounted future
cash flows
Carrying amount
Difference
Conclusion
Intangible A
Intangible B
Intangible C
$ 250,000
200,000
$ 50,000
Not impaired
$ 500,000
560,000
$ (60,000)
Impaired
$ 1,000,000
1,300,000
$(300,000)
Impaired
Step 2 of impairment test: For intangibles that are deemed impaired in Step 1,
calculate amount of impairment as the difference between discounted cash
flows and carrying value.
Intangible B
$ 420,000
560,000
$ 140,000
Present value of future cash flows
Carrying amount
Impairment
P1.10 (cont=d.)
1-44
Intangible C
$ 750,000
1,300,000
$ 550,000
Next, consider whether goodwill is impaired.
Step 1 of impairment test: compare fair value of reporting unit at 12-31-X3 to
carrying amount of unit at that date.
Fair value of reporting unit
Carrying amount
Difference
$17,000,000
18,500,000
$(1,500,000)
Conclusion: Goodwill may be impaired.
Step 2 of impairment test: Calculate implied fair value of goodwill at
12-31-X3 and compare to carrying amount at that date.
Fair value of reporting unit
Fair value of identifiable net assets
Implied fair value of goodwill
Carrying amount of goodwill
Difference
$ 17,000,000
14,200,000
$2,800,000
6,000,000
$ (3,200,000)
Conclusion: Goodwill is impaired.
Summary:
Amortization expense for 20X3:
Intangible A
Intangible B
Impairment write-offs for 20X3:
Intangible B
Intangible C
Goodwill
Total expense for 20X3
$
$
1-45
100,000
80,000
140,000
550,000
3,200,000
$
180,000
3,890,000
$4,070,000
P1.11
MERGER ENTRIES: POOLING AND PURCHASE
(APPENDIX)
Dr. (Cr.)
1.Purchase
2.Pooling
3.Pooling
Cash and Receivables
850,000
900,000
900,000
Inventory
920,000
800,000
800,000
Plant Assets
700,000
1,100,000
1,100,000
Accumulated Depreciation
-(600,000)
(600,000)
Goodwill
60,000 (1)
--Expenses of Business
Combination
-80,000
80,000
Current Liabilities
(700,000)
(700,000)
(700,000)
Long-Term Debt
(980,000)
(1,000,000)
(1,000,000)
Common Stock ($10 Par)
Additional Paid-In Capital
Retained Earnings
Cash
(1)
(2)
(3)
(100,000)
(670,000)
-(80,000)
(120,000)
(80,000)(2)
(300,000)
(80,000)
(208,000)
8,000 (3)
(300,000)
(80,000)
Goodwill = $850,000 cost - $500,000 stockholders equity of BETAX $290,000 excess of fair values over book values = $60,000.
Additional Paid-In Capital = ($10 x 12,000) - $(100,000 + $100,000) =
($80,000) credit
Additional Paid-In Capital = ($10 x 20,800) - ($100,000 + $100,000)
=$8,000 debit
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P1.12
EVALUATION OF POST-COMBINATION BALANCE
SHEETS (APPENDIX)
Requirement 1:
Current Assets ($1,000,000 - $55,000)
Plant and Equipment
Investment in Barnes
Current Liabilities
Long-Term Liabilities
Common Stock ($700,000 + [60,000 x $10])
Additional Paid-In Capital
Retained Earnings ($1,800,000 + $900,000 - [$600,000 $150,000 - $100,000 - $50,000] - $55,000
$ 945,000
3,000,000
1,100,000
$5,045,000
$ 600,000
800,000
1,300,000
0
2,345,000
$5,045,000
The Investment in Barnes is recorded at the book value of Barnes=
stockholders= equity ($1,100,000 = $150,000 + $50,000 + $900,000).
Requirement 2:
Current Assets ($1,000,000 - $55,000)
Plant and Equipment
Investment in Barnes
Current Liabilities
Long-Term Liabilities
Common Stock ($700,000 + [$60,000 x $10])
Additional Paid-In Capital ($100,000 + [60,000 x $40])
Retained Earnings
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$ 945,000
3,000,000
3,055,000
$7,000,000
$ 600,000
800,000
1,300,000
2,500,000
1,800,000
$7,000,000
P1.12 (cont=d.)
Calculation of Investment in Barnes:
Value of stock issued (60,000 X $50)
Direct acquisition costs
$3,000,000
55,000
$3,055,000
Requirement 3:
The second (purchase) balance sheet presents Amos as having $1,955,000
more in assets than does the first (pooling) balance sheet, a difference of about
33%. The second (purchase) balance sheet shows a debt to equity ratio of .25
(= $1,400/$5,600), while the first shows a ratio of .38 (= $1,400/3,645). The
second balance sheet would appear to represent a considerably stronger
company.
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