Solution Manual & Test Bank for Advanced Accounting,
Global Edition 13th Edition by Joseph Anthony|
ISBN:9781292214627| All Chapters Covered| LATEST
VERSION
1|Page
, 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.
2|Page
, Copyright © 2018 Pearson Education Ltd.
1-1
3|Page
, 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: Expense of 3,000,000
direct costs
(20,000)
Less: Issuance of stock
(10,000)
$10,570,000
Copyright © 2018 Pearson Education Ltd.
Global Edition 13th Edition by Joseph Anthony|
ISBN:9781292214627| All Chapters Covered| LATEST
VERSION
1|Page
, 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.
2|Page
, Copyright © 2018 Pearson Education Ltd.
1-1
3|Page
, 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: Expense of 3,000,000
direct costs
(20,000)
Less: Issuance of stock
(10,000)
$10,570,000
Copyright © 2018 Pearson Education Ltd.
