Solutions For Advanced Accounting 13th Edition By Floyd Beams, All Chapters Covered

Chapter 1

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 @ x z © @ x z 2018 @ x z Pearson @ x z Education, @ x z Inc.
1-1

,1-2 Business
@xzCombinations
SOLUTIONS @ x z TO @ x z EXERCISES

Solution @ x z E1-1

1 a
2 b
3 a
4 d


Solution @ x z E1-2 @ x z [AICPA @ x z adapted]

1 a
Plant @ x z and @ x z equipment @ x z should @ x z be @ x z recorded @ x z at @ x z the @ x z $220,000 @ x z fair
@ x z value.



2 c
Investment @ x z cost $1,600,000

Less: Fair @ x z value @ x z of @ x z net @ x z assets
@ x z

Cash $ 160,000
Inventory 380,000
Property @ x z and @ x z equipment 1,120,000
@xz— @xznet

Liabilities @ x z @ x z 1,300,000
@ x z (360,000
)
Goodwill $ 300,000


Solution @ x z E1-3

Stockholders’ @xzequity— z @xzPop
@
x January @ x z 3
@ x z Corporation @ x z on



Capital @ x z stock, @ x z $10 @ x z par, @ x z 600,000 @ x z shares $
@ x z outstanding @ x z 6,000,00
0
Other @ x z paid-in @ x z capital
[$400,000 @ x z + @ x z $3,000,000 @ x z – @xz$10,000] 3,390,000

Retained @ x z earnings @ x z [$1,200,000 @ x z - @ x z $20,000] @ x z
1,180,00
@ x z
0
Total @xzstockholders’ @xzequity $10,570,000

Entry @ x z to @ x z record @ x z combination

Investment @ x z in @ x z Son 6,000,000
Capital @ x z stock, @ x z $10 @ x z par 3,000,000
Other @ x z paid-in @ x z capital 3,000,000

Investment @ x z expense 20,000
Other @ x z paid-in 10,000
@ x z capital @xzCash 30,000

Check: @ x z Net @ x z assets @ x z per (book
@ x z books @ x z
@ x z value) $
Copyright @ x z © @ x z 2018 @ x z Pearson
@ x z Education, @ x z Inc.

, Chapter 1-3
@ x z 7,600,000
@xz1


Goodwill @ xz and @ xz write-up @ xz of
assets
@ xz

3,000,000
@xzLess: @ x z Expense @ x z of @ x z direct @ x z costs

(20,000)
Less: @ x z Issuance @ x z of
@ x z stock (10,000)
$10,570,000




Copyright @ x z © @ x z 2018 @ x z Pearson
@ x z Education, @ x z Inc.

, 1-4 Business
@xzCombinations
Solution @ x z E1-4

Journal @ x z entries @ x z on @ x z Pam’s @xzbooks @xzto @xzrecord @xzthe @xz acquisition

Investment @ x z in @ x z Sun 10,200,000
Common @ x z stock, @ x z $10 @ x z par 4,800,000
Additional @ x z paid-in @ x z capital 5,400,000
To @ x z record @ x z issuance @ x z of @ x z 480,000 @ x z shares @ x z of @ x z $10 @ x z par
@ x z common @ x z stock @ x z with @ x z a @ x z fair @xzvalue @ x z of @ x z $10,200,000

@ x z for @ x z the @ x z common @ x z stock @ x z of @ x z Sun @ x z in @ x z a @ x z business

@xzcombination.



Additional @ x z paid-in @ x z capital 60,000
Investment @ x z expenses 180,000
Other @ x z assets @ x z (or @ x z Cash) 240,000
To @ x z record @ x z costs @ x z of @ x z registering @ x z and @ x z issuing @ x z securities
@ x z as @ x z a @ x z reduction @ x z of @ x z paid- @xzin @ x z capital, @ x z and @ x z record

@ x z direct @ x z and @ x z indirect @ x z costs @ x z of @ x z combination @ x z as @xzexpenses.



Current @ x z assets 4,400,000
Plant @ x z assets 8,800,000
Liabilities 1,200,000
Investment @ x z in @ x z Sun 10,200,000
Gain @ x z from @ x z bargain @ x z purchase 1,800,000
To @ x z record @ x z allocation @ x z of @ x z the @ x z $10,200,000 @ x z cost @ x z of @ x z Sun
@ x z Company @ x z to @ x z identifiable @xzassets @ x z and @ x z liabilities

@ x z according @ x z to @ x z their @ x z fair @ x z values, @ x z and @ x z the

@ x z gain @xzfrom @ x z the @ x z bargain @ x z purchase,computed @ x z as @ x z follows:

Cost $10,200,000
Fair @ x z value @ x z of @ x z net @ x z assets @ x z acquired @ x z 12,000,000

Bargain @ x z purchase @ x z amount $ @ x z 1,800,000




Copyright @ x z © @ x z 2018 @ x z Pearson
@ x z Education, @ x z Inc.