SOLUTION MANUAL FOR
Advanced Financial Accounting
by Theodore E. Christensen
13th Edition
1-1
, CHAPTER 1
INTERCORPORATE ACQUISITIONS AND INVESTMENTS IN OTHER ENTITIES
ANSWERS TO QUESTIONS
Q1-1 Complex Organizational Structures Often Result When Companies Do Business In A
Complex Business Environment. New Subsidiaries Or Other Entities May Be Formed For
Purposes Such As Extending Operations Into Foreign Countries, Seeking To Protect Existing
Assets From Risks Associated With Entry Into New Product Lines, Separating Activities That Fall
Under Regulatory Controls, And Reducing Taxes By Separating Certain Types Of Operations.
Q1-2 The Split-Off And Spin-Off Result In The Same Reduction Of Reported Assets And
Liabilities. Only The Stockholders’ Equity Accounts Of The Company Are Different. The Number
Of Shares Outstanding Remains Unchanged In The Case Of A Spin-Off And Retained Earnings
Or Paid-In Capital Is Reduced. Shares Of The Parent Are Exchanged For Shares Of The
Subsidiary In A Split-Off, Thereby Reducing The Outstanding Shares Of The Parent Company.
Q1-3 Enron’s Management Used Special-Purpose Entities To Avoid Reporting Debt On Its
Balance Sheet And To Create Fictional Transactions That Resulted In Reported Income. It Also
Transferred Bad Loans And Investments To Special-Purpose Entities To Avoid Recognizing
Losses In Its Income Statement.
Q1-4 (A) A Statutory Merger Occurs When One Company Acquires Another Company And
The Assets And Liabilities Of The Acquired Company Are Transferred To The Acquiring
Company; The Acquired Company Is Liquidated, And Only The Acquiring Company Remains.
The Acquiring Company Can Give Cash Or Other Assets In Addition To Stock.
(b) A Statutory Consolidation Occurs When A New Company Is Formed To Acquire The
Assets And Liabilities Of Two Combining Companies. The Combining Companies Dissolve, And
The New Company Is The Only Surviving Entity.
(c) A Stock Acquisition Occurs When One Company Acquires A Majority Of The Common
Stock Of Another Company And The Acquired Company Is Not Liquidated; Both Companies
Remain As Separate But Related Corporations.
Q1-5 A Noncontrolling Interest Exists When The Acquiring Company Gains Control But Does
Not Own All The Shares Of The Acquired Company. The Non-Controlling Interest Is Made Up Of
The Shares Not Owned By The Acquiring Company.
Q1-6 Goodwill Is The Excess Of The Sum Of (1) The Fair Value Given By The Acquiring Company,
(2) The Fair Value Of Any Shares Already Owned By The Parent And (3) The Acquisition-Date
Fair Value Of Any Noncontrolling Interest Over The Acquisition-Date Fair Value Of The Net
Identifiable Assets Acquired In The Business Combination.
Q1-7 A Differential Is The Total Difference At The Acquisition Date Between The Sum Of (1)
The Fair Value Given By The Acquiring Company, (2) The Fair Value Of Any Shares Already
Owned By The Parent And (3) The Acquisition-Date Fair Value Of Any Noncontrolling Interest
And The Book Value Of The Net Identifiable Assets Acquired Is Referred To As The Differential.
1-2
,Q1-8 The Purchase Of A Company Is Viewed In The Same Way As Any Other Purchase Of
Assets. The Acquired Company Is Owned By The Acquiring Company Only For The Portion Of
The Year Subsequent To The Combination. Therefore, Earnings Are Accrued Only From The
Date Of Purchase Forward.
Q1-9 None Of The Retained Earnings Of The Subsidiary Should Be Carried Forward Under The
Acquisition Method. Thus, Consolidated Retained Earnings Immediately Following An
Acquisition Is Limited To The Balance Reported By The Acquiring Company.
Q1-10 Additional Paid-In Capital Reported Following A Business Combination Is The Amount
Previously Reported On The Acquiring Company's Books Plus The Excess Of The Fair Value
Over The Par Or Stated Value Of Any Shares Issued By The Acquiring Company In Completing
The Acquisition Less Any Sock Issue Costs.
Q1-11 When The Acquisition Method Is Used, All Costs Incurred In Bringing About The
Combination Are Expensed As Incurred. None Are Capitalized. However, Costs Associated With
The Issuance Of Stock Are Recorded As A Reduction Of Additional Paid-In Capital.
Q1-12 When The Acquiring Company Issues Shares Of Stock To Complete A Business
Combination, The Excess Of The Fair Value Of The Stock Issued Over Its Par Value Is
Recorded As Additional Paid-In Capital. All Costs Incurred By The Acquiring Company In Issuing
The Securities Should Be Treated As A Reduction In The Additional Paid-In Capital. Items Such
As Audit Fees Associated With The Registration Of The New Securities, Listing Fees, And
Brokers' Commissions Should Be Treated As Reductions Of Additional Paid-In Capital When
Stock Is Issued.
Q1-13 If The Fair Value Of A Reporting Unit Acquired In A Business Combination Exceeds Its
Carrying Amount, The Goodwill Of That Reporting Unit Is Considered Unimpaired. On The Other
Hand, If The Carrying Amount Of The Reporting Unit Exceeds Its Fair Value, Impairment Of
Goodwill Is Implied. An Impairment Must Be Recognized If The Carrying Amount Of The
Goodwill Assigned To The Reporting Unit Is Greater Than The Implied Value Of The Carrying
Unit’s Goodwill. The Implied Value Of The Reporting Unit’s Goodwill Is Determined As The
Excess Of The Fair Value Of The Reporting Unit Over The Fair Value Of Its Net Identifiable
Assets.
Q1-14 A Bargain Purchase Occurs When The Fair Value Of The Consideration Given In A
Business Combination, Along With The Fair Value Of Any Equity Interest In The Acquiree
Already Held And The Fair Value Of Any Noncontrolling Interest In The Acquiree, Is Less Than
The Fair Value Of The Acquiree’s Net Identifiable Assets.
Q1-15 The Acquirer Should Record The Clarification Of The Acquisition-Date Fair Value Of
Buildings As A Reduction To Buildings And Addition To Goodwill.
.
Q1-16 The Acquirer Must Revalue The Equity Position To Its Fair Value At The Acquisition
Date And Recognize A Gain. A Total Of $250,000 ($25 X 10,000 Shares) Would Be
Recognized In This Case Assuming That The $65 Per Share Price Is The Appropriate Fair
Value For All Shares (I.E. There Is No Control Premium For The New Shares Purchased).
1-3
, SOLUTIONS TO CASES
C1-1 Assignment Of Acquisition Costs
MEMO
To: Vice-President Of
Finance Troy Company
From: , CPA
Re: Recording Acquisition Costs Of Business Combination
Troy Company Incurred A Variety Of Costs In Acquiring The Ownership Of Kline Company And
Transferring The Assets And Liabilities Of Kline To Troy Company. I Was Asked To Review The
Relevant Accounting Literature And Provide My Recommendations As To What Was The
Appropriate Treatment Of The Costs Incurred In The Kline Company Acquisition.
Current Accounting Standards Require That Acquired Companies Be Valued Under ASC 805 At
The Fair Value Of The Consideration Given In The Exchange, Plus The Fair Value Of Any
Shares Of The Acquiree Already Held By The Acquirer, Plus The Fair Value Of Any
Noncontrolling Interest In The Acquiree At The Combination Date [ASC 805]. All Other
Acquisition-Related Costs Directly Traceable To An Acquisition Should Be Accounted For As
Expenses In The Period Incurred [ASC 805]. The Costs Incurred In Issuing Common Or
Preferred Stock In A Business Combination Are Required To Be Treated As A Reduction Of
The Recorded Amount Of The Securities (Which Would Be A Reduction To Additonal Paid-In
Capital If The Stock Has A Par Value Or A Reduction To Common Stock For No Par Stock).
A Total Of $720,000 Was Paid In Completing The Kline Acquisition. Kline Should Record The
$200,000 Finders’ Fee And $90,000 Legal Fees For Transferring Kline’s Assets And Liabilities
To Troy As Acquisition Expense In 20X7. The $60,000 Payment For Stock Registration And
Audit Fees Should Be Recorded As A Reduction Of Paid-In Capital Recorded When The Troy
Company Shares Are Issued To Acquire The Shares Of Kline. The Only Cost Potentially At
Issue Is The $370,000 Legal Fees Resulting From The Litigation By The Shareholders Of Kline.
If This Cost Is Considered To Be A Direct Acquisition Cost, It Should Be Included In Acquisition
Expense. If, On The Other Hand, It Is Considered To Be Related To The Issuance Of The
Shares, It Should Be Debited To Paid-In Capital.
Primary Citation
ASC 805
C1-2 Evaluation Of Merger
a. AT&T Had A Vast Cable Customer Base, But Felt That Timewarner’s Content Would
Greatly Enhance The Demand For Its Cable Services.
b. AT&T Provided Timewarner Shareholders With AT&T Stock And An Equal Value Of Cash.
c. The Cash Portion Of The Merger Was Funded Primarily With Debt.
d. This Would Be A Statutory Merger Since (1) The AT&T Name Survived Through The Merger And
(2) The Acquisition Was Formalized When AT&T Gave Both Stock And Cash.
1-4
Advanced Financial Accounting
by Theodore E. Christensen
13th Edition
1-1
, CHAPTER 1
INTERCORPORATE ACQUISITIONS AND INVESTMENTS IN OTHER ENTITIES
ANSWERS TO QUESTIONS
Q1-1 Complex Organizational Structures Often Result When Companies Do Business In A
Complex Business Environment. New Subsidiaries Or Other Entities May Be Formed For
Purposes Such As Extending Operations Into Foreign Countries, Seeking To Protect Existing
Assets From Risks Associated With Entry Into New Product Lines, Separating Activities That Fall
Under Regulatory Controls, And Reducing Taxes By Separating Certain Types Of Operations.
Q1-2 The Split-Off And Spin-Off Result In The Same Reduction Of Reported Assets And
Liabilities. Only The Stockholders’ Equity Accounts Of The Company Are Different. The Number
Of Shares Outstanding Remains Unchanged In The Case Of A Spin-Off And Retained Earnings
Or Paid-In Capital Is Reduced. Shares Of The Parent Are Exchanged For Shares Of The
Subsidiary In A Split-Off, Thereby Reducing The Outstanding Shares Of The Parent Company.
Q1-3 Enron’s Management Used Special-Purpose Entities To Avoid Reporting Debt On Its
Balance Sheet And To Create Fictional Transactions That Resulted In Reported Income. It Also
Transferred Bad Loans And Investments To Special-Purpose Entities To Avoid Recognizing
Losses In Its Income Statement.
Q1-4 (A) A Statutory Merger Occurs When One Company Acquires Another Company And
The Assets And Liabilities Of The Acquired Company Are Transferred To The Acquiring
Company; The Acquired Company Is Liquidated, And Only The Acquiring Company Remains.
The Acquiring Company Can Give Cash Or Other Assets In Addition To Stock.
(b) A Statutory Consolidation Occurs When A New Company Is Formed To Acquire The
Assets And Liabilities Of Two Combining Companies. The Combining Companies Dissolve, And
The New Company Is The Only Surviving Entity.
(c) A Stock Acquisition Occurs When One Company Acquires A Majority Of The Common
Stock Of Another Company And The Acquired Company Is Not Liquidated; Both Companies
Remain As Separate But Related Corporations.
Q1-5 A Noncontrolling Interest Exists When The Acquiring Company Gains Control But Does
Not Own All The Shares Of The Acquired Company. The Non-Controlling Interest Is Made Up Of
The Shares Not Owned By The Acquiring Company.
Q1-6 Goodwill Is The Excess Of The Sum Of (1) The Fair Value Given By The Acquiring Company,
(2) The Fair Value Of Any Shares Already Owned By The Parent And (3) The Acquisition-Date
Fair Value Of Any Noncontrolling Interest Over The Acquisition-Date Fair Value Of The Net
Identifiable Assets Acquired In The Business Combination.
Q1-7 A Differential Is The Total Difference At The Acquisition Date Between The Sum Of (1)
The Fair Value Given By The Acquiring Company, (2) The Fair Value Of Any Shares Already
Owned By The Parent And (3) The Acquisition-Date Fair Value Of Any Noncontrolling Interest
And The Book Value Of The Net Identifiable Assets Acquired Is Referred To As The Differential.
1-2
,Q1-8 The Purchase Of A Company Is Viewed In The Same Way As Any Other Purchase Of
Assets. The Acquired Company Is Owned By The Acquiring Company Only For The Portion Of
The Year Subsequent To The Combination. Therefore, Earnings Are Accrued Only From The
Date Of Purchase Forward.
Q1-9 None Of The Retained Earnings Of The Subsidiary Should Be Carried Forward Under The
Acquisition Method. Thus, Consolidated Retained Earnings Immediately Following An
Acquisition Is Limited To The Balance Reported By The Acquiring Company.
Q1-10 Additional Paid-In Capital Reported Following A Business Combination Is The Amount
Previously Reported On The Acquiring Company's Books Plus The Excess Of The Fair Value
Over The Par Or Stated Value Of Any Shares Issued By The Acquiring Company In Completing
The Acquisition Less Any Sock Issue Costs.
Q1-11 When The Acquisition Method Is Used, All Costs Incurred In Bringing About The
Combination Are Expensed As Incurred. None Are Capitalized. However, Costs Associated With
The Issuance Of Stock Are Recorded As A Reduction Of Additional Paid-In Capital.
Q1-12 When The Acquiring Company Issues Shares Of Stock To Complete A Business
Combination, The Excess Of The Fair Value Of The Stock Issued Over Its Par Value Is
Recorded As Additional Paid-In Capital. All Costs Incurred By The Acquiring Company In Issuing
The Securities Should Be Treated As A Reduction In The Additional Paid-In Capital. Items Such
As Audit Fees Associated With The Registration Of The New Securities, Listing Fees, And
Brokers' Commissions Should Be Treated As Reductions Of Additional Paid-In Capital When
Stock Is Issued.
Q1-13 If The Fair Value Of A Reporting Unit Acquired In A Business Combination Exceeds Its
Carrying Amount, The Goodwill Of That Reporting Unit Is Considered Unimpaired. On The Other
Hand, If The Carrying Amount Of The Reporting Unit Exceeds Its Fair Value, Impairment Of
Goodwill Is Implied. An Impairment Must Be Recognized If The Carrying Amount Of The
Goodwill Assigned To The Reporting Unit Is Greater Than The Implied Value Of The Carrying
Unit’s Goodwill. The Implied Value Of The Reporting Unit’s Goodwill Is Determined As The
Excess Of The Fair Value Of The Reporting Unit Over The Fair Value Of Its Net Identifiable
Assets.
Q1-14 A Bargain Purchase Occurs When The Fair Value Of The Consideration Given In A
Business Combination, Along With The Fair Value Of Any Equity Interest In The Acquiree
Already Held And The Fair Value Of Any Noncontrolling Interest In The Acquiree, Is Less Than
The Fair Value Of The Acquiree’s Net Identifiable Assets.
Q1-15 The Acquirer Should Record The Clarification Of The Acquisition-Date Fair Value Of
Buildings As A Reduction To Buildings And Addition To Goodwill.
.
Q1-16 The Acquirer Must Revalue The Equity Position To Its Fair Value At The Acquisition
Date And Recognize A Gain. A Total Of $250,000 ($25 X 10,000 Shares) Would Be
Recognized In This Case Assuming That The $65 Per Share Price Is The Appropriate Fair
Value For All Shares (I.E. There Is No Control Premium For The New Shares Purchased).
1-3
, SOLUTIONS TO CASES
C1-1 Assignment Of Acquisition Costs
MEMO
To: Vice-President Of
Finance Troy Company
From: , CPA
Re: Recording Acquisition Costs Of Business Combination
Troy Company Incurred A Variety Of Costs In Acquiring The Ownership Of Kline Company And
Transferring The Assets And Liabilities Of Kline To Troy Company. I Was Asked To Review The
Relevant Accounting Literature And Provide My Recommendations As To What Was The
Appropriate Treatment Of The Costs Incurred In The Kline Company Acquisition.
Current Accounting Standards Require That Acquired Companies Be Valued Under ASC 805 At
The Fair Value Of The Consideration Given In The Exchange, Plus The Fair Value Of Any
Shares Of The Acquiree Already Held By The Acquirer, Plus The Fair Value Of Any
Noncontrolling Interest In The Acquiree At The Combination Date [ASC 805]. All Other
Acquisition-Related Costs Directly Traceable To An Acquisition Should Be Accounted For As
Expenses In The Period Incurred [ASC 805]. The Costs Incurred In Issuing Common Or
Preferred Stock In A Business Combination Are Required To Be Treated As A Reduction Of
The Recorded Amount Of The Securities (Which Would Be A Reduction To Additonal Paid-In
Capital If The Stock Has A Par Value Or A Reduction To Common Stock For No Par Stock).
A Total Of $720,000 Was Paid In Completing The Kline Acquisition. Kline Should Record The
$200,000 Finders’ Fee And $90,000 Legal Fees For Transferring Kline’s Assets And Liabilities
To Troy As Acquisition Expense In 20X7. The $60,000 Payment For Stock Registration And
Audit Fees Should Be Recorded As A Reduction Of Paid-In Capital Recorded When The Troy
Company Shares Are Issued To Acquire The Shares Of Kline. The Only Cost Potentially At
Issue Is The $370,000 Legal Fees Resulting From The Litigation By The Shareholders Of Kline.
If This Cost Is Considered To Be A Direct Acquisition Cost, It Should Be Included In Acquisition
Expense. If, On The Other Hand, It Is Considered To Be Related To The Issuance Of The
Shares, It Should Be Debited To Paid-In Capital.
Primary Citation
ASC 805
C1-2 Evaluation Of Merger
a. AT&T Had A Vast Cable Customer Base, But Felt That Timewarner’s Content Would
Greatly Enhance The Demand For Its Cable Services.
b. AT&T Provided Timewarner Shareholders With AT&T Stock And An Equal Value Of Cash.
c. The Cash Portion Of The Merger Was Funded Primarily With Debt.
d. This Would Be A Statutory Merger Since (1) The AT&T Name Survived Through The Merger And
(2) The Acquisition Was Formalized When AT&T Gave Both Stock And Cash.
1-4
