SOLUTION MANUAL
Advanced Accounting, Global Edition
FLOYD A. BEAMS, JOSEPH H. ANTHONY, BRUCE BETTINGHAUS, KENNETH SMITH
13th Edition
, Chapter 1
Solution Manual & Test Bank for Advanced Accounting, Global Edition 13th Edition by Joseph
Anthony
BUSINESS COMBINATIONS
Answers to Questions
1 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.
2 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.
3 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.
4 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.
5 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.
Copyright © 2018 Pearson Education Ltd.
1-1
, Chapter 1 1-2
SOLUTIONS TO EXERCISES
Solution E1-1
1 b
2 c
3 c
4 c
Solution E1-2 [AICPA adapted]
1 a
Plant and equipment should be recorded at the $220,000 fair value.
2 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 — Pop Corporation on January 3
Capital stock, $10 par, 600,000 shares outstanding $ 6,000,000
Other paid-in capital
[$400,000 + $3,000,000 – $10,000] 3,390,000
Retained earnings [$1,200,000 - $20,000] 1,180,000
Total stockholders’ equity $10,570,000
Entry to record combination
Investment in Son 6,000,000
Capital stock, $10 par 3,000,000
Other paid-in capital 3,000,000
Investment expense 20,000
Other paid-in capital Cash 10,000
30,000
Check: Net assets per books (book value) $ 7,600,000
Goodwill and write-up of assets Less: 3,000,000
Expense of direct costs
(20,000)
Less: Issuance of stock
(10,000)
$10,570,000
Copyright © 2018 Pearson Education Ltd.
, Chapter 1 1-3
Solution E1-4
Journal entries on Pam’s books to record the acquisition
Investment in Sun 10,200,000
Common stock, $10 par 4,800,000
Additional paid-in capital 5,400,000
To record issuance of 480,000 shares of $10 par common stock with a fair value of $10,200,000 for
the common stock of Sun in a business combination.
Additional paid-in capital 60,000
Investment expenses 180,000
Other assets (or Cash) 240,000
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 4,400,000
Plant assets 8,800,000
Liabilities 1,200,000
Investment in Sun 10,200,000
Gain from bargain purchase 1,800,000
To record allocation of the $10,200,000 cost of Sun Company to identifiable assets and liabilities
according to their fair values, and the gain from the bargain purchase,computed as follows:
Cost $10,200,000
Fair value of net assets acquired 12,000,000
Bargain purchase amount $ 1,800,000
Copyright © 2018 Pearson Education Ltd.
Advanced Accounting, Global Edition
FLOYD A. BEAMS, JOSEPH H. ANTHONY, BRUCE BETTINGHAUS, KENNETH SMITH
13th Edition
, Chapter 1
Solution Manual & Test Bank for Advanced Accounting, Global Edition 13th Edition by Joseph
Anthony
BUSINESS COMBINATIONS
Answers to Questions
1 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.
2 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.
3 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.
4 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.
5 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.
Copyright © 2018 Pearson Education Ltd.
1-1
, Chapter 1 1-2
SOLUTIONS TO EXERCISES
Solution E1-1
1 b
2 c
3 c
4 c
Solution E1-2 [AICPA adapted]
1 a
Plant and equipment should be recorded at the $220,000 fair value.
2 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 — Pop Corporation on January 3
Capital stock, $10 par, 600,000 shares outstanding $ 6,000,000
Other paid-in capital
[$400,000 + $3,000,000 – $10,000] 3,390,000
Retained earnings [$1,200,000 - $20,000] 1,180,000
Total stockholders’ equity $10,570,000
Entry to record combination
Investment in Son 6,000,000
Capital stock, $10 par 3,000,000
Other paid-in capital 3,000,000
Investment expense 20,000
Other paid-in capital Cash 10,000
30,000
Check: Net assets per books (book value) $ 7,600,000
Goodwill and write-up of assets Less: 3,000,000
Expense of direct costs
(20,000)
Less: Issuance of stock
(10,000)
$10,570,000
Copyright © 2018 Pearson Education Ltd.
, Chapter 1 1-3
Solution E1-4
Journal entries on Pam’s books to record the acquisition
Investment in Sun 10,200,000
Common stock, $10 par 4,800,000
Additional paid-in capital 5,400,000
To record issuance of 480,000 shares of $10 par common stock with a fair value of $10,200,000 for
the common stock of Sun in a business combination.
Additional paid-in capital 60,000
Investment expenses 180,000
Other assets (or Cash) 240,000
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 4,400,000
Plant assets 8,800,000
Liabilities 1,200,000
Investment in Sun 10,200,000
Gain from bargain purchase 1,800,000
To record allocation of the $10,200,000 cost of Sun Company to identifiable assets and liabilities
according to their fair values, and the gain from the bargain purchase,computed as follows:
Cost $10,200,000
Fair value of net assets acquired 12,000,000
Bargain purchase amount $ 1,800,000
Copyright © 2018 Pearson Education Ltd.
