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Larsen: Modern Advanced

II. Business Combinations

Accounting, Tenth Edition

and Consolidated Financial Statements

5. Business Combinations

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© The McGraw−Hill Companies, 2005

Chapter Five Business Combinations

The Financial Accounting Standards Board has provided the following working definitio of business combination: [A] business combination occurs when an entity acquires net assets that constitute a business or acquires equity interests of one or more other entitites and obtains control over that entity or entities.1

Footnotes to this definition amplify the terms entity entity,, busi business, ness, and control as follows: Entity: A business enterprise, a new entity formed to complete a business combination, or a mutual enter prise—an entit y, not investor-owned, that provides dividends, lower costs, or other economic benefits directly to its owners, members, or participants. Business: An asset group that constitutes a business as characterized by the Emerging Issues Task Force (EITF) i n EITF Issue No. 98-3, “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business.” Control: Ownership by one company, directly or indirectly, of the outstanding voting shares of another company company..

In common parlance, business combinations are often referred to as mergers an acquisitions. The Financial Accounting Standards Board has suggested the following definitions f terms commonly used in discussions of business combinations.3  Read Free Foron 30this Days Sign up to vote title  Combined enterprise The accounting entity that results from a business Useful  Not useful  Cancel anytime. combination. Special offer for students: Only $4.99/month. Constituent companies The business enterprises that enter into a business

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Chapter 5 Business Combinatio

stockholders of all constituent companies for approval. A target combinee in a takeover typically resists the proposed business combination by resorting to one defensive tactics with the following colorful designations: Pac-man defense A threat to undertake a hostile takeover of the prospective combinor. White knight A search for a candidate to be the combinor in a friendly takeov Scorched earth The disposal, by sale or by a spin-off to stockholders, of one profitable business segments. Shark repellent An acquisition of substantial amounts of outstanding common for the treasury or for retirement, or the incurring of substantial long-term debt exchange for outstanding common stock.

Poison pill An amendment of the articles of incorporation or bylaws to make it difficult to obtain obt ain stockholder approval for a takeov takeover. er.

Greenmail An acquisition of common stock presently owned by the prospectiv combinor at a price substantially in excess of the prospective combinor’s combinor’s cost, w stock thus acquired placed in the treasury or retired.

Scope of Chapter

The first section of this chapter presents reasons for the popularity of business co tions and techniques for arranging them. Then, purchase accounting —the only ac method—for business combinations is explained and il lustrated.

BUSINESS COMBINATIONS: WHY AND HOW?

Why do business enterprises enter into a business combination? Although a num reasons have been cited, probably the overriding one for combinors in recen  hass be ha been en growth have major growth.. Business enterprises Read Free Foroperating 30this Days Sign up to vote on titleobjectives oth  growth, but that goal increasingly has motivated combinor managements to un Not useful  Useful  Cancel anytime. business busi ness comb combinat inations ions.. Advocat Ad vocates es of this external method of achieving grow Special offer for students: Only $4.99/month. out that it is m uch more rapid than growth through internal means. There is no q that expansion and diversification of product lines, or enlarging the marke

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stockholders of all constituent companies for approval. A target combinee in a takeover typically resists the proposed business combination by resorting to one defensive tactics with the following colorful designations: Pac-man defense A threat to undertake a hostile takeover of the prospective combinor. White knight A search for a candidate to be the combinor in a friendly takeov Scorched earth The disposal, by sale or by a spin-off to stockholders, of one profitable business segments. Shark repellent An acquisition of substantial amounts of outstanding common for the treasury or for retirement, or the incurring of substantial long-term debt exchange for outstanding common stock.

Poison pill An amendment of the articles of incorporation or bylaws to make it difficult to obtain obt ain stockholder approval for a takeov takeover. er.

Greenmail An acquisition of common stock presently owned by the prospectiv combinor at a price substantially in excess of the prospective combinor’s combinor’s cost, w stock thus acquired placed in the treasury or retired.

Scope of Chapter

The first section of this chapter presents reasons for the popularity of business co tions and techniques for arranging them. Then, purchase accounting —the only ac method—for business combinations is explained and il lustrated.

BUSINESS COMBINATIONS: WHY AND HOW?

Why do business enterprises enter into a business combination? Although a num reasons have been cited, probably the overriding one for combinors in recen  hass be ha been en growth have major growth.. Business enterprises Read Free Foroperating 30this Days Sign up to vote on titleobjectives oth  growth, but that goal increasingly has motivated combinor managements to un Not useful  Useful  Cancel anytime. business busi ness comb combinat inations ions.. Advocat Ad vocates es of this external method of achieving grow Special offer for students: Only $4.99/month. out that it is m uch more rapid than growth through internal means. There is no q that expansion and diversification of product lines, or enlarging the marke


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Business Combinations and Consolidated Financial Statements

Antitrust Considerations

One obstacle faced by large corporations that undertake business combinations is the po sibility of antitrust litigation. The U.S. government on occasion has opposed concentratio of economic power in large business enter prises. Consequently, Consequently, business combinations quently have been challenged by the Federal Trade Trade Commission or the Antitrust Division the Department of Justice, under the provisions of Section 7 of the Clayton Act, whic reads in part as follows: No corporation engage d in commerce shall acquire, directly or indirec tly tly,, the whole or any part of the stock or other share cap ital and no corporati on subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another corporation engaged also in commerce, where in any line of commerce in any section of the country the effect of such acquisition may be substantially to lessen competition or to tend to create a monopoly monopoly..

The breadth of the preceding legislation has led to federal antitrust action against a types of business combinations: horizontal (combinations involving enterprises in th same industry), vertical (combinations between an enterprise and its customers or sup pliers),, and conglomerate (combinations between enterprises in unrelated industries pliers) markets).

Methods for Arranging Business Combinations

The four common methods for carrying out a business combination are statutory merge statutory consolidation, acquisition of common stock, and acquisition of assets.

Statutory Merger Merger

As its name impli es, a statutory merger is executed under provisions provisions of applicable sta laws. In a statutory merger merger,, the boards of directors of the constituent companies appro a plan for the exchange of voting common stock (and perhaps some preferred stoc  cash, or long-term debt) of one of the cor porations (the ) Days fortitle all the outstandin survivor r this Read Free Foron 30 Sign up to survivo vote  voting common stock of the other corporations. Stockholders of all constituent comp Useful  Not useful  Cancelrequire anytime. approval by two-third nies must approve the terms of the merger; some states Special offer for students: Only $4.99/month. of the stockholders. The survivor corporation issues its common stock or other consid eration to the stockholders of the other corporations in exchange for all their holding


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Statutory Consolidation Consolidation

A statutory consolidation also is consummated in accordance with applicable sta However, in a consolidation a new corporation is formed to issue its common stock outstanding common stock of two or more existing corporations, which then go existence. The new corporation thus acquires the net assets of the defunct corpo whose activities may be continued as divisions of the new corporation. To summarize, the procedures in a statutory consolidation are:

1. The boards of of directors of the constituent companies work work out the terms of the dation. 2. Stockholders of the constituent constituent companies approve approve the terms of the consolidatio consolidatio cordance with applicable corporate cor porate bylaws and state laws. 3. A new corporation is formed to issue its common stock to the stockholders stituent companies in exchange for all their outstanding voting common stock o companies. 4. The new corporation corporation dissolves and liquidates liquidates the constituent constituent companies, recei change for its common stock investments the net assets of those companies.

Acquisition of Common Common Stock

One corporation (the investor ) may issue preferred or common stock, cash, debt ments, or a combination thereof, to t o acquire from present stockholders a controlling in the voting common stock of another corporation (the investee). This stock acq program may be accomplished through direct acquisition in the stock market, thro gotiations with the principal stockholders of a closely held corporation, or through offer to stockholders of a publicly owned corporation. A tender offer is a publ nounced intention to acquire, for a stated amount of consideration, a maximum nu shares of the combinee’s combinee’s common stock “tendered” by holders thereof to an agent, an investment banker or a commercial bank. The price per share stated in the tend usually is well above the prevailing market price of the combinee’s common stock. I  corpora trolling interest in the combinee’s voting common stock is acquired, that Read Free Foron 30this Days Sign up to vote title  not d comes affiliated with the combinor parent company as a subsidiary, but is Useful Not useful   Business combinations a and liquidated and remains a separate legalCancel entity. anytime. through common stock acquisitions require authorization by the combinor’s boar Special offer for students: Only $4.99/month. rectors and may require ratification by the combinee’ combinee’ss stockholders. Most hostile ta


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common stock, to be issued in a business combination generally is determined by varia tions of the following methods:

1. Capitalization of expected average annual earnings of the combinee at a desired rate return. 2. Determination of current fair value of the combinee’s net assets (including goodwill).

The price for a business combination consummated for cash or debt instruments gene ally is expressed in terms of the total dollar amount of the consideration issued. When com mon stock is issued by the combinor in a business combination, the price is expressed as ratio of the number of shares of the combinor’s common stock to be exchanged for eac share of the combinee’s common stock.

Illustration of Exchange Ratio

The negotiating officers of Palmer Corporation have agreed with the stockholders o Simpson Company to acquire all 20,000 outstanding shares of Simpson common stock for total price of $1,800,000. Palmer’s common stock presently is trading in the market at $6 a share. Stockholders of Simpson agree to accept 30,000 shares of Palmer’s common stoc at a value of $60 a share in exchange for their stock holdings i n Simpson. The exchange r tio is expressed as 1.5 shares of Palmer’s common stock for each share of Simpson’s com mon stock, in accordance with the following computation: You're Reading a Preview Unlock full access with a free trial. Computation of Exchange Ratio in Business Combination

Number of shares of Palmer Corporation common stock to be issued Download Withcommon Free Trial Number of shares of Simpson Company stock to be exchanged Exchange ratio: 30,000  20,000

30 20 1.5

METHODwith OF ACCOUNTING MasterPURCHASE your semester Scribd FORRead Free For 30 Days  Sign up to vote on this title BUSINESS COMBINATIONS  & The New York Times  Useful  Not useful In FASB Statement No. 141, “Business Combinations,” the FASB mandated purchase a Special offer for students: Only $4.99/month.

Cancel anytime.

counting for all business combinations entered into after June 30, 2001. 4 The key comp nents of purchase accounting were identified as follows by the FASB:5

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Determination of the Combinor

Because the carrying amounts of the net assets of the combinor are not affect business combination, the combinor must be accurately identified. The FASB sta in a business combination effected solely by the distribution of cash or other a by i ncur ring liabilities , the combinor is the distributing or incurring const itue pany.6 For combinations effected by the issuance of equity securities, consider all the facts and circumstances is required to identify the combinor. However, a c theme is that the combinor is the constituent company whose stockholders as a g tain or receive the largest portion of the voting rights of the combined enterpr thereby can elect a majority of the governing board of directors or other group combined enterprise.7

Computation of Cost of a Combinee

The cost of a combinee in a business combination accounted for by the purchase m the total of (1) the amount of consideration paid by the combinor, (2) the combinor “out-of-pocket” costs of the combination, and (3) any contingent consideration terminable on the date of the business combination.

You're Reading a Preview Amount of Consideration

This is the total amount of cash paid, the current fair value of other assets distribu Unlock full access with a free trial. present value of debt securities issued, and the current fair (or market) value of curities issued by the combinor.

Download With Free Trial Direct Out-of-Pocket Costs

Included in this category are some legal fees, some accounting fees, and finder’s finder’s fee is paid to the investment banking firm or other organization or individu investigated the combinee, assisted in determining the price of the business comb and otherwise rendered services to bring about the combination.  comb Costs of registering with the SEC andRead issuing in a business debt securities Free For 30this Days Sign up to vote on title  Costs are debited to Bond Issue Costs; they are not part of the cost of the combinee. Useful  Not useful  istering with the SEC and issuing equity securities areanytime. not direct costs of the busine Cancel Special offer for students: Only $4.99/month. bination but are offset against the proceeds from the issuance of the securities. out-of-pocket costs of the combination, such as salaries of officers of constituent


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Illustration of Contingent Consideration

The contract for Norton Company’s acquisition of the net assets of Robinson Company pro vided that Norton would pay $800,000 cash for Robinson’s net assets (including goodwil which would be included in the Robb Division of Norton Company. The following conti gent consideration also was included in the contract:

1. Norton was to pay Robinson $100 a unit for all sales by Robb Division of a slow-mov product that had been written down to scrap value by Robinson prior to the busine combination. No portion of the $800,000 price for Robinson’s net assets involved th slow-moving product. 2. Norton was to pay Robinson 25% of any pretax financial income in excess of $500,00 (excluding income from sale of the slow-moving product) of Robb Division for each the four years subsequent to the business combination.

On January 2, 2005, the date of completion of the business combination, Robinson Com pany had firm, noncancelable sales orders for 500 units of the slow-moving product. The s orders and all units of the slow-moving product were transferred to Norton by Robinson. Norton’s cost of the net assets acquired from Robinson includes $50,000 (500  $100 $50,000) for the determinable contingent consideration attributable to the backlog of sal orders for the slow-moving product. However, because any pretax accounting income o Reading a Preview Robb Division for theYou're next four years cannot be determined on January 2, 2005, no provisio for the 25% contingent consideration is included in Norton’s cost on January 2, 2005. Th Unlock full access with aconsideration free trial. subsequent accounting for such contingent is described on pages 178–179.

Allocation of Cost of a Combinee Download With Free Trial

The FASB required that the cost of a combinee in a business combination be allocated assets (other than goodwill) acquired and liabilities assumed based on their estimated fa values on the date of the combination. Any excess of total costs over the amounts thus a located is assigned to goodwill.8 Methods for determining fair values included present va ues for receivables and most liabilities; net realizable value less a reasonable profit for wo in process and finished goods inventories; and appraised values for land, natural resource 9 Read Free For 30 Days Sign up to vote on this title and nonmarketable securities. In addition, the following combinee intangible assets  we 10 to be recognized individually and valued at fair value:  Useful  Not useful


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Special offer for students: Only $4.99/month. Assets arising from contractual or legal rights, such as patents, copyrights, and franchises Other assets that are separable from the combinee entity and can be sold, licensed, ex-

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2. In a business combination, leases of the combinee-lessee are classified by the co enterprise as they were by the combinee unless the provisions of a lease are mod the extent it must be considered a new lease.12 Thus, unmodified capital lease combinee are treated as capital leases by the combined enterprise, and the lease erty and related liability are recognized in accordance with the guidelines o Statement No. 141. 3. A combinee in a business combination may have preacquisition contingencies, contingent assets (other than potential income tax benefits of a loss carryforward), gent liabilities, or contingent impairments of assets, that existed prior to completio business combination. If so, an allocation period, generally not longer than one ye the date the combination is completed, may be used to determine the current fair v a preacquisition contingency. A portion of the cost of a combinee is allocated to quisition contingency whose fair value is determined during the allocation period wise, an estimated amount is assigned to a preacquisition contingency if it probable that an asset existed, a liability had been incurred, or an asset had been i at the completion of the combination. Any adjustment of the carrying amount of quisition contingency subsequent to the end of the allocation period is include measurement of net income for the accounting period of the adjustment. 13

Goodwill

You're Reading a Preview

Goodwill frequently is recognized in business combinations because the total cos Unlock fullcurrent access with a free trial. combinee exceeds the fair value of identifiable net assets of the combin amount of goodwill recognized on the date the business combination is consumma be adjusted subsequently when contingent consideration becomes issuable, as illust Download With Free Trial page 178.14

“Negative Goodwill”

In some business combinations (known as bargain purchases), the current fair va signed to the identifiable net assets acquired exceed the total cost of the combinee gain purchase is most likely to occur for a combinee with a history of losses o  common stock prices are extremely low. The ofFor theon current fair values over to Read Free 30 Days Signexcess up to vote this title  is applied pro rata to reduce (but not belowUseful the amounts initially assigned to Not useful  zero)  Cancel anytime. accounted for by the acquired assets except financial assets other than investments Special offer for students: Only $4.99/month. method; assets to be disposed of by sale; deferred tax assets; prepaid assets relating sion or other postretirement benefits; and any other current assets. If any excess of


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Mason’s stockholders for all 100,000 issued and outstanding shares of Mason’s no-pa $10 stated value common stock. In addition, Saxon paid the following out-of-pocket cos associated with the business combination:

Combinor’s Out-ofPocket Costs of Business Combination

Accounting fees: For investigation of Mason Company as prospective combinee For SEC registration statement for Saxon common stock Legal fees: For the business combination For SEC registration statement for Saxon common stock Finder’s fee Printer’s charges for printing securities and SEC registration statement SEC registration statement fee Total out-of-pocket costs of business combination

$

5 60 10 50 51 23

$200

There was no contingent consideration in the merger contract. Immediately prior to the merger, Mason Company’s condensed balance sheet was a follows:


Unlock full access with a free trial. MASON COMPANY (combinee)

Combinee’s Balance Sheet Prior to Merger Business Combination

Balance Sheet (prior to business combination) December 31, 2005

Download With Free Trial Assets

Current assets

$1,00

Plant assets (net) Other assets

3,00 60

Total assets Master your semester with Scribd Read Free Foron 30this Days Sign up to vote title Liabilities and Stockholders’ Equity & The New York Times Current liabilities  Useful  Not useful Long-term debt Special offer for students: Only $4.99/month.

Common stock, no-par, $10 stated value

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  $ 50 1,00 1,00

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The condensed journal entries that follow are required for Saxon Corporation (th binor) to record the merger with Mason Company on December 31, 2005, as combination. Saxon uses an investment ledger account to accumulate the total Mason Company prior to assigning the cost to identifiable net assets and goodwill

SAXON CORPORATION (combinor)

Combinor’s Journal Entries for Business Combination (Statutory Merger)

Journal Entries December 31, 2005 Investment in Mason Company Common Stock (150,000  $25) Common Stock (150,000  $10)

3,750,000

Paid-in Capital in Excess of Par To record merger with Mason Company. Investment in Mason Company Common Stock ($5,000  $10,000  $51,250)

66,250

Paid-in Capital in Excess of Par ($60,000  $50,000  $23,000  750)

133,750

Cash You're Reading a Preview To record payment of out-of-pocket costs incurred in merger with Mason Company. Accounting, legal, and finder’s fees in Unlock full access with a free trial. connection with the merger are recognized as an investment cost; other out-of-pocket costs are recorded as a reduction in the proceeds received from issuance of common stock.

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Current Assets

1,150,000

Plant Assets Other Assets

3,400,000 600,000

Discount on Long-Term Debt Goodwill Current Liabilities

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($3,750,000  $66,250) To allocate total cost of liquidated Mason Company to

50,000 116,250

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Note that no adjustments are made in the foregoing journal entries to reflect the curre fair values of Saxon’s identifiable net assets or goodwill, because Saxon is the combino in the business combination. Accounting for the income tax effects of business combinations is considered in Chapter Mason Company (the combinee) prepares the condensed journal entry below to recor the dissolution and liquidation of the company on December 31, 2005. MASON COMPANY (combinee)

Recording the Liquidation of Combinee

Journal Entry December 31, 2005 Current Liabilities Long-Term Debt

500,000 1,000,000

Common Stock, $10 stated value Paid-in Capital in Excess of Stated Value

1,000,000 700,000

Retained Earnings Current Assets

1,400,000 1,000,

Plant Assets (net) Other Assets To record liquidation of company in conjunction You're Reading a Preview with merger with Saxon Corporation.

3,000, 600,

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Illustration of Purchase Accounting for Acquisition of Net Assets, with Bargain-Purchase Excess Download With Free Trial

On December 31, 2005, Davis Corporation acquired all the net assets of Fairmont Corp ration directly from Fairmont for $400,000 cash, in a business combination. Davis pa legal fees of $40,000 in connection with the combination. The condensed balance sheet of Fairmont prior to the business combination, with relat current fair value data, is presented below:  Read Free Foron 30this Days Sign up to vote title  FAIRMONT CORPORATION (combinee) Useful  Not useful Balance Sheet (prior to  business combination)

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December 31, 2005

Carrying

Current

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Thus, Davis acquired identifiable net assets with a current fair value of $5 ($1,260,000  $760,000  $500,000) for a total cost of $440,000 ($400,000  $440,000). The $60,000 excess of current fair value of the net assets over their cost t ($500,000  $440,000  $60,000) is prorated to the plant assets and intangible a the ratio of their respective current fai r values, as follows: Allocation of Excess of Current Fair Value over Cost of Identifiable Net Assets of Combinee in Business Combination

$900,000 $900,000  $100,000 $100,000 To intangible assets: $60,000  $900,000  $100,000 Total excess of current fair value of identifiable net assets over combinor’s cost To plant assets: $60,000 

No part of the $60,000 bargain-purchase excess is allocated to current assets or vestment in marketable securities. The journal entries below record Davis Corporation’s acquisition of the net a Fairmont Corporation and payment of $40,000 legal fees:

You're Reading a Preview Combinor’s Journal Entries for Business Combination (Acquisition of Net Assets)

DAVIS CORPORATION (combinor) Unlock full access with a free trial.Entries Journal December 31, 2005

Download WithCorporation Free Trial Investment in Net Assets of Fairmont Cash To record acquisition of net assets of Fairmont Corporation. Investment in Net Assets of Fairmont Corporation Cash

40,000

Master your semesterTowith Scribd record payment of legal fees incurred in acquisition of net Read Free Foron 30this Days Sign up to vote title assets of Fairmont Corporation. & The New York TimesCurrent Assets  Useful  Not useful Special offer for students: Only $4.99/month.Investments in Marketable Debt Securities Plant Assets ($900,000

$54 000)

400,000

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  200,000 60,000 846 000

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corporation recognizes net assets acquired from the combinor at their carrying amount the combinor’s accounting records; however, net assets acquired from the combinee ar recognized by the new corporation at their current fair value. To illustrate, assume the following balance sheets of the constituent companies involv in a statutory consolidation on December 31, 2005:

LAMSON CORPORATION AND DONALD COMPANY Separate Balance Sheets (prior to business combination) December 31, 2005

Lamson Corporation

Donald Comp

Assets Current assets

$ 600,000

$ 40

Plant assets (net) Other assets

1,800,000 400,000

1,20 30

Total assets

$2,800,000

$1,90

$ 400,000 500,000 430,000

$ 30 20 62

300,000 1,170,000

40 38

$2,800,000

$1,90

Liabilities and Stockholders’ Equity

You're Reading a Preview Current liabilities Long-term debt Common stock, $10 parUnlock full access with a free trial. Additional paid-in capital Retained earnings Download

With Free Trial

Total liabilities and stockholders’ equity

The current fair values of both companies’ liabilities were equal to carrying amounts. Cu rent fair values of identifiable assets were as follows for Lamson and Donald, respectivel  other a current assets, $800,000 and $500,000; plant assets, $2,000,000 andDays $1,400,000; Read Free Foron 30 Sign up to vote this title  sets, $500,000 and $400,000. Useful Not useful   On December 31, 2005, in a statutory consolidation approved Cancel anytime. by shareholders of bot Special offer for students: Only $4.99/month. constituent companies, a new corporation, LamDon Corporation, issued 74,000 shares o no-par, no-stated-value common stock with an agreed value of $60 a share, based on th


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Because the former stockholders of Lamson Corporation receive the larger interes common stock of LamDon Corporation (43 ⁄ 74, or 58%), Lamson is the combinor in t ness combination. Assuming that LamDon paid $200,000 out-of-pocket costs of th tory consolidation after it was consummated on December 31, 2005, LamDon’s entries would be as follows:

Journal Entries for New Corporation for Business Combination (Statutory Consolidation)

LAMDON CORPORATION Journal Entries December 31, 2005 Investment in Lamson Corporation and Donald Company Common Stock (74,000  $60) Common Stock, no par

4,440,000

To record consolidation of Lamson Corporation and Donald Company as a purchase. Investment in Lamson Corporation and Donald Company Common Stock Common Stock, no par Cash

110,000 90,000


To record payment of costs incurred in consolidation of Lamson Corporation and Donald Company. Accounting, legal, and finder’s Unlock with a are freerecorded trial. as fees in connection withfull theaccess consolidation investment cost; other out-of-pocket costs are recorded as a reduction in the proceeds received from the issuance of common Download With Free Trial stock. Current Assets ($600,000  $500,000) Plant Assets ($1,800,000  $1,400,000) Other Assets ($400,000  $400,000)

1,100,000 3,200,000 800,000

Master your semesterGoodwill with Scribd Current Liabilities ($400,000 $300,000) Read Free Foron 30this Days Sign up to vote title Long-Term Debt ($500,000 $200,000) & The New York Times Investment in Lamson Corporation and Donald  Useful  Not useful Company 



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Common Stock ($4,440,000  $110,000) To allocate total cost of investment to identifiable assets and liabilities, at carrying amount for combinor Lamson Corporation’

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850,000

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determination of the number of shares of common stock to be issued in the combinatio (see page 176).

Subsequent Issuance of Contingent Consideration

As indicated on page 169, contingent consideration that is determinable on the date of business combination is included in the measurement of cost of the combinee. Any ot contingent consideration is recorded when the contingency is resolved and the addition consideration becomes issuable or is issued. Returning to the Norton Company illustration on page 170, assume that by December 3 2005, the end of the first year following Norton’s acquisition of the net assets of Robinso Company, another 300 units of the slow-moving product had been sold, and Norton’s Rob Division had pretax financial income of $580,000 (exclusive of income from the slow moving product). On December 31, 2005, Norton prepares the following journal entry record the resolution of contingent consideration:

Journal Entry for Contingent Consideration Involving Subsequent Sales and Earnings

Goodwill Payable to Robinson Company

50,000 50

To record payable contingent consideration to January 2, 2005, You're Readingapplicable a Preview business combination as follows:  $100) Sales of slow-moving product Unlock full(300 access with a free trial. Pretax income of Robb Division [($580,000  $500,000)  0.25] Download With Free Trial Total payable

$30,000 20,000 $50,000

Some business combinations involve contingent consideration based on subseque Master your semester with Scribd market prices of debt or equity securities issued to effect the combination. Unless  the su Read Free Foron 30this Days Sign up to vote title sequent market price equals at least a minimum amount on a subsequent date or  dates, a & The New York Times Usefulby the Not useful issued combinor ditional securities, cash, or other assets must be to compensate fo Cancel anytime.

the deficiency. Special offer for students: Only $4.99/month. For example, assume the following journal entry for t he statutory merger of Soltero Co

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Journal Entry for Contingent Consideration Involving Subsequent Market Price of Common Stock

Paid-in Capital in Excess of Stated Value (24,000  $5) Common Stock to Be Issued for Contingent Consideration

120,000

To record additional shares of common stock to be issued under terms of Jan. 2, 2005, merger with Mero Company, as follows: Required value of common stock issued in merger (120,000  $12) Less: Market value of common stock, Dec. 31, 2005 (120,000  $10) Market value of additional common stock to be issued Number of additional shares of common stock to be issued ($240,000  $10)

$1,440,000 1,200,000 $ 240,000 24,000

The foregoing journal entry is in accord with the following provisions of FASB St No. 141, “Business Combinations”:

The issuance of additional securities or distribution of other consideration upon resoluti a contingency based on security prices shall not affect the cost of the [combinee], regard of whether the amount specified is a security price to be maintained or a higher security You're a Preview to be achieved. When Reading the contingency is resolved and additional consideration is distrib utable, the [combinor] shall record the current fair value of the additional consideration Unlock full access with a free trial. recorded for securities issued at the da sued or issuable. However, the amount previously [the business combination] shall be simultaneously reduced to the lower current value o those securities. Reducing the value of debt securities previously issued to their later fai Free Trial value results Download in recording a With discount on debt securities. The discount should be amortize from the date the additional securities are issued.16

IFRS3, “Business Combinations”

The International Accounting Standards Board (IASB) formerly required purcha accounting for all business combinations except those deemed a uniting of intere Read Free For 30 Days Sign up to of vote this title companies c fined as a combination in which the stockholders theon constituent  into one entity the whole of the net assets operations of those Useful Not usefulcompanies to ac and  Cancel anytime. continuing mutual sharing of the risks and benefits of the combined enterprise. Special offer for students: Only $4.99/month. However, in 2004 the IASB mandated, in International Financial Reporting Sta “Business Combinations,” purchase-type accounting for all business combinations,


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Financial Statements Following a Business Combination

The balance sheet for a combined enterprise issued as of the date of a business combina tion accomplished through a statutory merger, statutory consolidation, or acquisition of a sets includes all the assets and liabilities of the constituent companies. (The consolidate balance sheet issued immediately following a combination that results in a paren subsidiary relationship is described in Chapter 6.) In a balance sheet following a busines combination, assets and liabilities of the combinor are at carrying amount, assets acquire from the combinee are at current fair value (adjusted for any bargain-purchase excess a illustrated on page 175), and retained earnings is that of the combinor only. The incom statement of the combined enterprise for t he accounting period in which a business comb nation occurred includes the operating results of the combinee after the date of the com bination only.

Disclosure of Business Combinations in a Note to Financial Statements

Because of the complex nature of business combinations and their effects on the financi position and operating results of the combined enterprise, extensive disclosure is require for the periods in which they occur. Following are the extensive disclosure requirements for business combinations estab 19 lished by the FASB: You're Reading a Preview The notes to the financial statements of a combined entity shall disclose the followin information in the period which a material business Unlockinfull access with a free trial. combination is completed:

1. The name and a brief description of the acquired entity and the percentage of votin Download With Free Trial equity interests acquired 2. The primary reasons for the acquisition, including a description of the factors that co tributed to a purchase price that results in recognition of goodwill 3. The period for which the results of operations of the acquired entity are included in t income statement of the combined entity

Master your semester with 4. The cost of the Scribd acquired entity and, if applicable, the number of shares of  equity inte Read Free Foron 30this Days Sign up vote title issued or is ests (such as common shares, preferred shares, or to partnership interests)  & The New York Times Useful useful suable, the value assigned to those interests, the basis determining that value and forNot Cancel anytime.

5. A condensed balance sheet disclosing the amount assigned to each major asset and li Special offer for students: Only $4.99/month. bility caption of the acquired entity at the acquisition date

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goodwill or to other intangible assets acquired are significant in relation to the tota the acquired entity:

1. For intangible assets subject to amortization: a. The total amount assigned and the amount assigned to any major intangib class b. The amount of any significant residual value, in total and by major intangib class c. The weighted-average amortization period, in total and by major intangib class 2. For intangible assets not subject to amortization, the total amount assigned amount assigned to any major intangible asset class 3. For goodwill: a. The total amount of goodwill and the amount that is expected to be deductibl purposes b. The amount of goodwill by reportable segment (if the combined entity is r to disclose segment information in accordance with FASB Statement No. closures about Segments of an Enterprise and Related Information,” un practicable)

Reading a Preview The notes toYou're the financial statements shall disclose the following information if of individually immaterial business combinations completed during the period are Unlock full access with a free trial. in the aggregate: 1. The number of entities acquired and a brief description of those entities


2. The aggregate cost of the acquired entities, the number of equity interests (such mon shares, preferred shares, or partnership interests) issued or issuable, and th assigned to those interests

3. The aggregate amount of any contingent payments, options, or commitments accounting treatment that will be followed should any such contingency occur (i tially significant in relation to the aggregate cost of the acquired entities)  Read Free Foron 30this Days Sign up to vote title  ass 4. Information regarding intangible assets and goodwill if the aggregate amount Useful Not useful   those assets acquired is significant in relation to the anytime. aggregate cost of the acquired Cancel Special offer for students: Only $4.99/month. If the combined entity is a public business enterprise, the notes to the fi


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adjusted to the accounting base recognized for each in recording the combination. P forma information related to results of operations of periods prior to the combination sha be limited to the results of operations for the immediately preceding period. Disclosure al shall be made of the nature and amount of any material, nonrecurring items reported in th pro forma results of operations.

APPRAISAL OF ACCOUNTING STANDARDS FOR BUSINESS COMBINATIONS

The accounting standards for business combinations described and illustrated in the pr ceding pages of this chapter may be criticized on grounds that they are not consistent wi the conceptual framework for financial accounting and reporting. The principal criticisms of purchase accounting center on the recognition of good will. Many accountants take exception to the residual basis for valuing goodwill es lished in FASB Statement No. 141. These critics contend that part of the amounts thu assigned to goodwill probably apply to other identifiable intangible assets. Accordingl goodwill in a business combination should be valued directly by use of methods scribed in intermediate accounting textbooks. Any remaining cost not directly allocate You're Reading a Preview to all identifiable tangible and intangible assets and to goodwill would be apportioned those assets based on the amounts assigned in the first valuation process or recognize Unlock full access with a free trial. as a loss. Other accountants question whether current fair values of the combinor’s net assets— especially goodwill—should be disregarded in accounting for a business combinatio Download With Free Trial They maintain it is inconsistent to reflect current fair values for net assets of the combine only, in view of the significance of many combinations involving large constituent com panies. The FASB has undertaken a reexamination of purchase accounting, despite the recenc of its issuance of FASB Statement No. 141, because of many questions that have bee posed regarding the accounting standards established in that pronouncement. As of the Read Free Foron 30this Days Sign up to vote title of this writing, the FASB had not issued a revised Standard.   Useful  Not useful


SEC ENFORCEMENT ACTIONS DEALING WITH

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“. . . In the Matter of Smith & Stephens Accountancy Corporation and James J (September 10, 1984), the SEC permanently prohibited the independent auditor manufacturing corporation from appearing or practicing before the SEC, with the that, under specified conditions, the auditors could apply for reinstatement af years.

AAER 275

In AAER 275, “. . . In the Matter of Charles C. Lehman, Jr.” (September 28, 19 SEC reported the permanent disbarment of a CPA from appearing or practicing b with the proviso that the CPA might, if he complied with specified conditions, ap reinstatement in 18 months. According to the SEC, the CPA, on behalf of the which he was managing partner, improperly expressed an unqualified audit opinio financial statements of a combined enterprise following a merger in which the was improperly identified as the combinor. The merging company actually was the nor because following the business combination its former sole stockholder owned 8 the outstanding common stock of the survivor. The consequence of the misidenti of the combinor was the overstatement of a principal asset of the combined enter 12,045% ($1,342,600 compared with $11,055).

You're Reading a Preview AAER 598 Unlock full access with a free trial.

A significant part of AAER 598, “. . . In the Matter of Meris Laborato Stephen B. Kass, and John J. DiPitro” (September 26, 1994), deals with an inde Download Withaccounting Free Trialfor direct out-of-pocket costs of b clinical laboratory’s improper combinations. According to the SEC, included in such costs, which were cap as part of the total costs of the combinations, were payroll costs of employees w to be terminated following the combinations; write-offs of combinee accounts able; erroneously paid sales commissions; various recurring internal costs of ope and payments under consulting contracts. The aggregate overstatement of inco  sulting from the improper accounting was ordered Read Free ForSEC 30this Days Sign80%. up to The vote on title the clinical  the tory, its CEO, and its CFO (a CPA) to cease and desist from violating Useful  Not useful  securities laws. Cancel anytime. Special offer for students: Only $4.99/month.


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1. Define business combination. 2. Differentiate between a statutory merger and a statutory consolidation.

3. Identify two methods that may be used, individually or jointly, to determine an appr priate price to pay for a combinee in a business combination. 4. How is the combinor in a business combination determined? 5. State how each of the following out-of-pocket costs of a merger business combinatio is accounted for by the combinor: a. Printing costs for proxy statement mai led to combinor’s stockholders in advance special meeting to ratify terms of the merger. b. Legal fees for negotiating the merger. c. CPA firm’s fees for auditing financial statements in SEC registration statement co ering shares of common stock issued in the merger. d. Printing costs for common stock certificates issued in the merger. e. Legal fees for SEC registration statement covering shares of common stock issue in the merger. f. CPA firm’s fees for advice on income tax aspects of the merger.

6. Goodwill often is recognized in business combinations. Explain the meaning of goo You're Reading a Preview will and negative goodwill. 7. Define contingent consideration in a business combination. Unlock full access with a free trial. 8. How is the total cost of a combinee allocated in a business combination? 9. Define the term preacquisition contingencies.


10. What combinee intangible assets other than goodwill are to be given accounting reco nition in a business combination?

MasterExercises your semester with Scribd Read Free Foron 30this Days Sign up to vote title & The New York5.1)Times Useful  Not useful Select the best answer for each of the following questions: multiple-choice (Exercise Cancel anytime.

 

Special offer for students: Only $4.99/month. 1. Is one or more of the constituent companies always liquidated in a business combina carried out by means of:

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3. A target company’s defense against an unfriendly takeover that involves the dis one or more profitable business segments of the target is t ermed: a. Pac-man defense b. Scorched earth c. Shark repellent d. Poison pill 4. Are the combinees always liquidated in business combinations accomplished b

a. b. c. d.

Statutory Merger?

Statutory Consolidation?

Acquisition of Common Stock?

Acquisition of Assets?

Yes Yes Yes Yes

Yes Yes Yes No

Yes No No No

No Yes No Yes

5. In a “bargain purchase” business combination, the excess of the current fair valu combinee’s identifiable net assets over the cost to the combinor is: a. Credited to the combinor’s Negative Goodwill ledger account. b. Offset against the balance of the combinor’s Investment in Combinee C ledger account. c. Credited to the combinor’s Additional Paid-in Capital ledger account. You're Reading a Preview d. Accounted for in some other manner. 6. The term survivor is associated business combination accomplished thro Unlock full access withwith a freea trial. a. A statutory merger. b. A statutory consolidation. Download Withstock. Free Trial of common c. An acquisition d. An acquisition of assets.

7. Does the date-of-combination cost of the combinee in a business com include:

Master your semester with Scribd Determinable Contingent & The New York Times a. Consideration? Yes Special offer for students: Only $4.99/month. b. c.

Yes No

Read Free Foron 30this Days Sign Nondeterminable up to vote title

Contingent Consideration?

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 Not useful Cancel anytime. Yes

Useful

No Yes

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liabilities were equal to their carrying amounts; the current fair values of Mel’s current asse and other assets (none intangible) were $120,000 and $850,000, respectively, on January 31 2005. Also on that date, Sal paid direct out-of-pocket costs of the business combinatio $40,000, and costs of registering and issuing its common stock, $70,000. Prepare journal entries (omit explanations) for Sal Corporation to record its merger wi Mel Company on January 31, 2005. (Disregard income taxes.)

(Exercise 5.3)

The condensed balance sheet of Geo Company on March 31, 2005, is shown below:

GEO COMPANY Balance Sheet (prior to business combination) March 31, 2005 Assets

CHECK FIGURE

Cash

Amount of goodwill, $10,000.

Other current assets Plant assets (net)

$ 2 14 74

Total assets

$90

You're Liabilities Readingand a Preview Stockholders’ Equity Current liabilities Long-term debt Common stock, $2 par

$ 8


Additional paid-in capitalDownload Retained earnings

20 18

With Free Trial

12 32


$90

Master your semester with Scribd  of Ge On March 31, 2005, Master Corporation paid Read $700,000 the net assets Free Forfor 30all Days Sign up tocash vote on this title  (except cash) in a business combination. The carrying amounts of Geo’s other current a & The New York Times Useful Not useful   sets and current liabilities were the same as their current fair values. However, current fa Cancel anytime.

Special offer for students: Only $4.99/month. values of Geo’s plant assets and long-term debt were $920,000 and $190,000, respective Also on March 31, Master paid the following direct out-of-pocket costs for the busine

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CHECK FIGURE

COMBINEE COMPANY

Debit goodwill, $85,257.

Balance Sheet (prior to business combination) January 31, 2005 Assets Current assets Plant assets Other assets

Total assets

Liabilities and Stockholders’ $ 300,000 600,000 100,000

$1,000,000

Current liabilities Long-term debt Common stock, no par or stated value Retained earnings Total liabilities and stockholders’ equity

On January 31, 2005, Combinor Company issued $700,000 face amount of 6%, bonds due January 31, 2025, with a present value of $625,257 at a 7% yield, to Co Company for its net assets. On January 31, 2005, the current fair values of Combin abilities equaled their carrying amounts; however, current fair values of Combinee were as follows:

You're Reading a Preview Current assets Unlock full access with a free trial. Plant assets Other assets (none intangible)


Also on January 31, 2005, Combinor paid out-of-pocket costs of the combina follows:

Master your semesterAccounting, with legal, Scribd and finder’s fees incurred forup combination Read Free Foron 30this Days Sign to vote title Costs of registering 6% bonds with SEC & The New York TimesTotal out-of-pocket costs  Useful  Not useful Special offer for students: Only $4.99/month.

Cancel anytime.

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CHECK FIGURE

COMBINEE COMPANY


Balance Sheet (prior to business combination) March 31, 2005

Carrying Amounts

Curre Fair Va

Current assets Plant assets (net)

$200,000 400,000

$260, 480,

Other assets (none intangible) Total assets

140,000 $740,000

150,

$ 80,000 260,000

$ 80, 260,

Assets

Liabilities and Stockholders’ Equity Current liabilities Long-term debt Common stock, no par or stated value Retained earnings

150,000 250,000


$740,000

You're Reading a Preview Prepare journal entries (omit explanations) for Combinor Company on March 31, 200 to record the business combination with Combinee Company. (Disregard income taxes.) Unlock full access with a free trial.

(Exercise 5.6)

On May 31, 2005, Byers Corporation acquired for $560,000 cash all the net assets exce cash of Sellers Company, and paid $60,000 cash to a law firm for legal services in connectio Download With Free Trial with the business combination. The balance sheet of Sellers on May 31, 2005, was as follow

CHECK FIGURE

SELLERS COMPANY


Balance Sheet (prior to business combination) May 31, 2005

Master your semester withAssets Scribd Cash $ & The New York Times Other current assets (net) Plant assets (net) Special offer for students: Only $4.99/month.

Intangible assets (net)

Equity Liabilities and Stockholders’

40,000 280,000 760,000 120,000

Read Free Foron 30this Days Sign up to vote title Liabilities

Useful stock, Notparuseful  Common  $1 Cancel anytime. Retained earnings Total liabilities and

$ 62 25 33

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combination. There was no contingent consideration. Current fair values of Disposer tifiable net assets on September 26, 2005, were as follows:

CHECK FIGURE

Curr

Debit intangible assets, $47,500.

Cash Other current assets Plant assets Intangible assets (all recognizable in accordance with generally accepted accounting principles for business combinations) Current liabilities Long-term debt (face amount $60,000)

Prepare journal entries (omit explanations) for Acquirer Corporation on Septem 2005, to record the business combination. (Disregard income taxes.)

(Exercise 5.8)

CHECK FIGURE Credit paid-in capital, $400,000.

On December 31, 2005, Combinor Company issued 100,000 shares of its $1 par c stock (current fair value $5 a share) in exchange for all the outstanding common s Combinee Company in a statutory merger. Also on that date, Combinor paid the fo out-of-pocket costs in connection the combination: You're Reading awith Preview Unlockand full legal accessfees withrelating a free trial. Accounting, finder’s, to business combination Costs associated with SEC registration statement Total out-of-pocket costs of business combination


The balance sheet of Combinee on December 31, 2005, was as follows: COMBINEE COMPANY Master your semester with Scribd Balance Sheet (prior to business combination) Read Free Foron 30this Days Sign up to vote title December 31, 2005 & The New York Times Useful  Not useful Assets

Special offer for students: Only $4.99/month. Current assets

Plant assets (net)

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CHECK FIGURE

COMBINEE COMPANY

Credit paid-in capital, $2,900,000.

Balance Sheet (prior to business combination) September 24, 2005 Current assets

$

Plant assets Other assets (none intangible)

Total assets

200,000

Current liabilities

700,000

Long-term debt Common stock, no par or stated value Retained earnings

100,000

$ 1,000,000


$ 10 30 20 40 $1,00

On that date, Combinor Corporation issued 100,000 shares of its $1 par ($30 current fa value) common stock for all the outstanding common stock of Combinee Company in a stat tory merger and paid the following out-of-pocket costs in connection with the combination Direct out-of-pocket costs of the combination Costs associated with SEC registration statement Total out-of-pocket costs


$130 50 $180


The current fair values of Combinee’s identifiable net assets were equal to their carryin amounts; however, $400,000 of Combinor’s cost was allocable to identifiable tangible Download Free Trial intangible assets of Combinee thatWith resulted from Combinee’s research and development a tivities. Those assets had no further use in research and development projects. Prepare journal entries (omit explanations) on September 24, 2005, for (a) Combinor Co poration and (b) Combinee Company to record the statutory merger. (Disregard income taxes

(Exercise 5.10)

The balance sheet of Nestor Company on February 28, 2005, with related current fair va ues of assets and liabilities, was as follows:  Read Free Foron 30this Days Sign up to vote title

Master your semester with Scribd CHECK FIGURE & The New York Times Credit paid-in capital, Special offer for students: Only $4.99/month. $600,000.

 Useful  Not useful NESTOR COMPANY Cancel anytime.

Balance Sheet (prior to business combination) February 28, 2005

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On February 28, 2005, Bragg Corporation issued 600,000 shares of its $1 par c stock (current fair value $2 a share) to Lucy Rowe, sole stockholder of Nestor Co for all 500,000 shares of Nestor common stock owned by her, in a merger business nation. Because the merger was negotiated privately and Rowe signed a “letter agre not to dispose of the Bragg common stock she received, the Bragg stock was not su SEC registration requirements. Thus, only $8,000 in legal fees was incurred to ef merger; these fees were paid in cash by Bragg on February 28, 2005. Prepare journal entries for Bragg Corporation on February 28, 2005, to record t ness combination with Nestor Company. (Disregard income taxes.)

(Exercise 5.11)

The condensed balance sheet of Maxim Company on December 31, 2005, prior to t ness combination with Sorrel Corporation, was as follows:

CHECK FIGURE

MAXIM COMPANY

Debit paid-in capital, $40,000

Balance Sheet (prior to business combination) December 31, 2005 Assets Current assets Plant assets (net)

You're Reading Other assets (none intangible) Total assets

a Preview

Unlock full access with a free trial. Liabilities and Stockholders’ Equity

Current liabilities


Common stock, $1 par Additional paid-in capital Retained earnings


Master your semester with Scribd  Read Free For 30this Sign up to vote title On December 31, 2005, Sorrel issued 800,000 shares of on its $1Days par commonstock ( value $3 a share) for all the outstanding of Maxim & The New York Timesfair Useful stock useful in a statutory  common  Not Also on December 31, 2005, Sorrel paid the following out-of-pocket costs of the b Special offer for students: Only $4.99/month. combination with Maxim:

Cancel anytime.

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CHECK FIGURE Credit paid-in capital, $1,900,000.

Finder’s and legal fees relating to business combination Costs associated with SEC registration statement Total out-of-pocket costs of business combination

$100 150 $250

On August 31, 2005, Combinee’s balance sheet included the following:

Carrying Amounts Current assets Plant assets (net) Current liabilities Long-term debt Common stock Retained earnings

$

Current Fair Va

500,000 2,600,000 400,000 1,000,000 800,000 900,000

$

600,000 2,800,000 400,000 1,000,000

Prepare journal entries (omit explanations) for Combinor Corporation on August 3 2005, to record the statutory merger with Combinee Company. (Disregard income taxes

(Exercise 5.13) CHECK FIGURE b. Basic EPS, $2.64.

You're Reading a Preview On November 1, 2005, Sullivan Corporation issued 50,000 shares of its $10 par commo stock in exchange for all the common stock of Mears Company in a statutory merger. Ou Unlock full access with a free trial. of-pocket costs of the business combination may be disregarded. Sullivan tentative recorded the shares of common stock issued at par and debited the Investment in Mea Company Common Download Stock ledger With account forTrial $500,000. Mears Company was liquidate Free and became Mears Division of Sullivan Corporation. The net income of Sullivan Corpor tion and Mears Company or Mears Division during 2005 was as follows:

Master your semester with Scribd Sullivan Corporation Mears Company & The New York Times Mears Division of Sullivan Corporation Special offer for students: Only $4.99/month.

*Excludes any portion of Mears Division net income.

Jan. 1 through Oct. 31

Nov. 1 through De

 $420,000 $80,000* Read Free Foron 30this Days Sign up to vote title 350,000 



Useful

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50,000

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Neither Sullivan nor Mears Company declared or paid dividends during 2005. months, Sullivan’s common stock had been trading at about 40 times earnings; November 1, 2005, Mears Company common stock had been trading at 10 times e Answer the following questions, assuming that the difference between current ues and carrying amounts of Mears Company’s identifiable net assets applies Show supporting computations and disregard income taxes. a. What is Sullivan’s net income for the year ended December 31, 2005?

b. What is Sullivan’s basic earnings per share for the year ended December 31, 20 c. What is the amount of Sullivan’s retained earnings on December 31, 2005?

(Exercise 5.14)

CHECK FIGURE Number of additional shares to be issued, 60,000.

On December 31, 2005, Tucker Corporation acquired all the net assets of Loring C for 100,000 shares of Tucker’s $2 par common stock having a current fair value o share. Terms of the business combination required Tucker to issue additional sh common stock to Loring on December 31, 2006, if the market price of the commo was less than $16 a share on that date. Sufficient shares would be issued to m aggregate market value of the total shares issued to Loring equal to $1,600,000 on ber 31, 2006. The market price of Tucker’s common stock on that date was $10 a s Prepare a journal entry for Tucker Corporation on December 31, 2006, to record ditional shares of common stock issuable to Loring Company on that date.



Cases (Case 5.1)


You have been engaged to audit the financial statements of Solamente Corporation fiscal year ended May 31, 2005. You discover that on June 1, 2004, Mika Compa been merged into Solamente in a business combination. You also find that both So and Mika (prior to its liquidation) incurred legal fees, accounting fees, and printin for the business combination; both companies debited those costs to an intangib ledger account entitled “Cost of Business Combination.” In its journal entry  to re Read Free Forits 30Cost Days Sign up to vote on this title business combination with Mika, Solamente increased of Business Comb  account by an amount equal to the balance Mika’s  comparable ledger account. Useful Not useful  of

Master your semester with Scribd & The New York Times Special offer for students: Only $4.99/month. Instructions

Cancel anytime.

Evaluate Solamente’s accounting for the out-of-pocket costs of the business comb

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(Case 5.3)

On February 15, 2005, officers of Shane Corporation agreed with George Merlo, sole stock holder of Merlo Company and Merlo Industries, Inc., to acquire all his common stock ow ership in the two companies as follows:

1. 10,000 shares of Shane’s $1 par common stock (current fair value $30 a share) would b issued to George Merlo on February 28, 2005, for his 1,000 shares of $10 par commo stock of Merlo Company. In addition, 20,000 shares of Shane common stock would b issued to George Merlo on February 28, 2010, if aggregate net income of Merlo Com pany for the five-year period then ended exceeded $300,000. 2. $250,000 cash would be paid to George Merlo on February 28, 2005, for his 10,0 shares of $1 par common stock of Merlo Industries, Inc. In addition $250,000 in cas would be paid to George Merlo on February 28, 2010, if aggregate net income of Mer Industries, Inc., for the five-year period then ended exceeded $300,000.

Both Merlo Company and Merlo Industries, Inc., were to be m erged into Shane on Fe ruary 28, 2005, and were to continue operations after that date as divisions of Shan George Merlo also agreed not to compete with Shane for the period March 1, 2005 through February 28, 2010. Because the merger was negotiated privately and George Mer signed a “letter agreement” not to dispose of the Shane common stock he received, th business combination was not subject to the jurisdiction of the SEC. Out-of-pocket costs the business combination may be disregarded. You're Reading a Preview Selected financial statement data of the three constituent companies as of February 2 Unlock full access with a free trial. 2005 (prior to the merger), were as follows: Shane Download With Free Trial

Corporation

Total assets Stockholders’ equity Net sales Basic earnings per share

$25,000,000 10,000,000 50,000,000 5

Merlo Company $

500,000 200,000 1,500,000 30

Merlo Industries $ 600,0 300,0 2,500,0

Master your semester with Scribd  Read Free Foron 30this Days Sign up to vote title The controller of Shane prepared the following condensed journal entries to record th  & The New York Times  Useful  Not useful merger on February 28, 2005: Cancel anytime.


Ass ts th

tha

d ill

600 000

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Instructions Do you concur with the controller’s journal entries? Explain.

(Case 5.4)

Robert Frank, sole stockholder of Frank Electronics, Inc., a non-publicly owned c tion, has brought you the following balance sheets:

FRANK ELECTRONICS, INC. Balance Sheet March 31, 2005 Assets Current assets

$150,000

Plant assets (net) Intangible assets (net)*

Total assets

Liabilities and Stockholder’s Current liabilities

300,000 50,000

Long-term debt Common stock, no par or stated value, 10,000 shares authorized, issued, and outstanding

You're Reading $500,000 a Preview

Retained earnings Total liabilities and stockholder’s equity

Unlock full access with aprinciples free trial. *All recognizable under generally accepted accounting for business combinations.

Download With Free Trial LESTER ENTERPRISES, INC. Balance Sheet March 31, 2005 Assets Master your semesterCashwith Scribd Common stock subscriptions & The New York Timesreceivable Investments in Special offer for students: Only $4.99/month.

marketable equity securities (available

Liabilities and Stockholder’s $ 50,000

Liabilities

Read Free Foron 30this Days Sign up to vote title

5,000 



Common stock, no par or  value, 50,000 Useful stated Not useful  Cancel anytime. shares authorized: Issued and outstanding, 10 000 shares

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Current assets Plant assets Intangible assets Goodwill Total

$ 40,000 90,000 20,000 30,000 $180,000

In response to your inquiries, Robert Frank explained that Lester Enterprises, now sole owned by George Lester, was registered with the Securities and Exchange Commission b cause it had been a publicly owned corporation before George Lester had “bought out” th other five shareholders. Later, George Lester sold all operating assets of Lester Enterprise to an unrelated publicly owned corporation in exchange for equity securities of that corp ration (Lester Enterprises’ marketable equity securities investment). Robert Frank als stated that George Lester had subscribed to 5,000 shares of Lester Enterprises commo stock on March 31, 2005, and that the subscription price of $5,000 was payable on June 3 2005.

Instructions

Would Lester Enterprises, Inc., be the combinor in the merger with Frank Electronics, Inc Explain. You're Reading a Preview

(Case 5.5)

Paragraph B121 of FASB Statement No. 141, “Business Combinations,” reads in part Unlock full access with a free trial. follows: Based on its analysis, the [Financial Accounting Standards] Board concluded that core goodWith Free will meets the assetsDownload definition in [Statement of Trial Financial Accounting Concepts No. 6, “Elements of Financial Statements”] . . .

Instructions

After reading paragraphs B101 through B120 of Statement No. 141, do you agree with th FASB’s conclusion? Explain.  Read Free Foron 30this Days Sign up to vote title

Master your semester with Scribd & The New York Times Problems Special offer for students: Only $4.99/month. (Problem 5.1)



 Not useful Cancel anytime.

Useful



On January 31, 2005, La Salle Corporation acquired for $540,000 cash all the net assets e

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The current fair value of De Soto’s liabilities on January 31, 2005, was $620,000. T rent fair values of its noncash assets were as follows on January 31, 2005: Other current assets Plant assets Intangible assets (All recognizable under generally accepted accounting principles for business combinations.)

Instructions

Prepare journal entries for La Salle Corporation on January 31, 2005, to record th sition of the net assets of De Soto Company except cash. Show computations in t nations for the journal entries where appropriate. (Disregard income taxes.)

(Problem 5.2)

The balance sheet of Cooper Company on August 31, 2005, with related cur rent fa data, was as follows:

CHECK FIGURE

COOPER COMPANY


Balance Sheet (prior to business combination) August 31, 2005


Carrying Amounts

F


Assets

Current assets

$180,000

Plant assets (net) Download With Free Trial Intangible assets (net) (All recognizable under generally accepted accounting principles for business combinations.)

640,000

80,000

Total assets

Master your semester with Scribd Current liabilities debt & The New York TimesLong-term Total liabilities Special offer for students: Only $4.99/month.

$900,000 Liabilities and Stockholders’ Equity

Common stock, no par or stated value R t i d i



Read Free Foron 30this Days Sign up to vote $title 80,000



200,000  Not useful Cancel anytime.

Useful

$280,000 $400,000 220 000

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WABASH CORPORATION Journal Entries December 31, 2005 Investment in Indiana Company Common Stock 12% Bonds Payable

10,000,000 10,000,

To record merger with Indiana Company.

CHECK FIGURE

Investment in Indiana Company Common Stock

Debit plant assets $9,800,000.

Bond Issue Costs Cash To record payment of costs incurred in merger with Indiana Company. Current Assets ($3,140,000



$560,000)

Plant Assets ($9,070,000  $330,000) Goodwill

150,000 50,000 200,

3,700,000 9,400,000 400,000

Current Liabilities Investment in Indiana Company Common Stock To allocate total cost of Indiana Company investment to identifiable assets and You're liabilities, Reading with the remainder to a Preview goodwill. (Income tax effects are disregarded.) Amount of goodwill is computed as follows: Unlock full access with a free trial. Total cost of investment ($10,000,000  $150,000) $10,150,000 Less: Carrying amount of Download With Free Trial identifiable net assets [($3,140,000  $9,070,000)  $3,350,000] $8,860,000 Excess of current fair values of identifiable net assets over Read Free Foron 30this Days Sign up to vote title carrying amounts ($560,000   Useful  Not useful Cancel anytime. $330,000) 890,000 9,750,000 Special offer for students: Only $4.99/month. Amount of goodwill $ 400,000


3,350, 10,150,

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Wabash had issued 1 million shares of its no-par, no-stated-value common stock wit rent fair value of $10 a share to effect the combination, that the bond issue costs we of issuing common stock, that the current fair value of the plant assets was $9,900,0 that all other facts remained the same.

(Problem 5.4)

The balance sheet of Combinee Company on Oct ober 31, 2005, was as follows:

CHECK FIGURE

COMBINEE COMPANY


Balance Sheet (prior to business combination) October 31, 2005 Assets Cash Other current assets Plant assets (net) Total assets Liabilities and Stockholders’ Equity Current liabilities Long-term debt You're Common stock, $5 par

Reading a Preview

Additional paid-in capital Unlock full access with a free trial. Retained earnings Total liabilities and stockholders’ equity


Combinor Corporation’s board of directors established the following current fai for Combinee’s identifiable net assets other than cash:

Master your semester with Scribd Other current assets $ 500,000 Free Foron 301,000,000 Days Sign up to vote this title Plant assets (net) Read Current liabilities  Useful  Not 180,000 & The New York Times useful Long-term debt 240,000 Special offer for students: Only $4.99/month.

Cancel anytime.

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CHECK FIGURE Debit goodwill, $180,000.

Total assets Total liabilities Common stock, $25 par Additional paid-in capital Retained earnings (deficit) Total liabilities and stockholders’ equity

Conner Company

Capsol Comp

$700,000 $300,000 200,000 80,000 120,000 $700,000

$670 $300 250 130 (10 $670

On July 31, 2005, Conner and Capsol entered into a statutory consolidation. The ne company, Consol Corporation, issued 45,000 shares of $10 par common stock for all th outstanding common stock of Conner and 30,000 shares for all the outstanding commo stock of Capsol. Out-of-pocket costs of the business combination may be disregarded.

Instructions

Prepare journal entries for Consol Corporation on July 31, 2005, to record the busines combination. Assume that Capsol is the combinor; that current fair values of identifiable a sets are $800,000 for Conner and $700,000 for Capsol; that each company’s liabilities a You're Reading a Preview fairly stated at $300,000; and that t he current fair value of Consol’s common stock is $14 share. (Disregard income taxes.) Unlock full access with a free trial.

(Problem 5.6)

The condensed balance sheets of Silva Cor poration, the combinor, prior to and subseque to its March 1, 2005, merger with Marvel Company, are as follows:


CHECK FIGURE

SILVA CORPORATION

Credit additional paidin capital, net, $550,000.

Balance Sheets (prior to and subsequent to business combination) March 1, 2005


Current assets

Subsequen  Busines  UsefulCombination  Not useful Combinat Prior to

Read Free Foron 30this Days Sign up to vote title Business

 Assets

Cancel anytime.

$ 500,000

$ 850,0

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Instructions

Reconstruct the journal entries (omit explanations) that Silva Corporation prep March 1, 2005, to record the business combination with Marvel Company. (Disre come taxes.)

(Problem 5.7)

CHECK FIGURE Debit goodwill, $50,870.

On October 31, 2005, Solomon Corporation issued 20,000 shares of its $1 par (cur value $20) common stock for all the outstanding common stock of Midland Com a statutory merger. Out-of-pocket costs of the business combination paid by Solo October 31, 2005, were as follows:

Direct costs of the business combination Costs of registering and issuing common stock Total out-of-pocket costs of business combination

Midland’s balance sheet on October 31, 2005, follows:


MIDLAND COMPANY Sheeta (prior to business combination) Unlock fullBalance access with free trial. October 31, 2005

Inventories

Assets Download With Free Trial

Other current assets Plant assets (net) Total assets

Master your semester with Scribd Liabilities andRead Stockholders’ Equity Free Foron 30this Days Sign up to vote title Payable to Solomon Corporation & The New York TimesOther liabilities  Useful  Not useful Common stock, $3 par Special offer for students: Only $4.99/month.

Additional paid-in capital

Cancel anytime.

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(Problem 5.8)

The balance sheet on March 31, 2005, and the related current fair value data for Edg Company were as follows:

CHECK FIGURE

EDGAR COMPANY

Debit patent, $46,000.

Balance Sheet (prior to business combination) March 31, 2005

Carrying Amounts

Curren Fair Val

Assets Current assets Plant assets (net)

$ 500,000 1,000,000

$ 57 1,20

Patent (net) Total assets

100,000 $1,600,000

5


$ 300,000 400,000

$ 30 45

Common stock, $10 par Unlock full access with a free trial. Retained earnings

100,000 800,000

Liabilities and Stockholders’ Equity Current liabilities Long-term debt


$1,600,000


On April 1, 2005, Value Corporation issued 50,000 shares of its no-par, no-stated-va common stock (current fair value $14 a share) and $225,000 cash for the net assets o Edgar Company, in a business combination. Of the $125,000 out-of-pocket costs paid b Value on April 1, 2005, $50,000 were accounting, legal, and finder’s fees related to the bus Read Free For 30this Days Sign up to vote on title  ness combination, and $75,000 were costs related to the issuance of common stock.  Useful  Not useful


Cancel anytime.

Instructions Special offer for students: Only $4.99/month. Prepare journal entries for Value Corporation on April 1, 2005, to record the business com

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STAVE CORPORATION AND MOLO COMPANY Balance Sheets (prior to business combination) April 30, 2005

Stave Corporation

M

Assets Current assets Plant assets (net)

$ 4,350,000 18,500,000

Patents (net) Deferred charges Total assets

450,000 150,000 $23,450,000 Liabilities and Stockholders’ Equity $ 2,650,000

Liabilities Common stock, $10 par Common stock, $5 par

12,000,000

Additional paid-in capital Retained earnings

4,200,000 5,850,000

Less: Treasury stock, at cost,Reading 100,000 shares You're a Preview Total liabilities and stockholders’ equity

(1,250,000) $23,450,000


Additional Information Download With Free Trial

1. The current fair values of the identifiable assets and liabilities of Stave Corpora of Molo Company were as follows on April 30, 2005:

of Identifiable Net Assets Master your semester with ScribdCurrent Fair Values Read Free Foron 30this Days April 30,up 2005 Sign to vote title & The New York Times  Useful  Not useful Stave

STAVE CORPORATION AND MOLO COMPANY


Current assets

Cancel anytime.

 

M

Corporation $ 4 950 000

$

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and issued 10% bonds at face amount of $16,900,000 for all the outstanding common stoc of Molo. The current fair value of the bonds was equal to their face amount. (Disregar bond issue costs and income taxes.)

(Problem 5.10)

Coolidge Corporation agreed to pay $850,000 cash and issue 50,000 shares of its $10 par current fair value a share) common stock on September 30, 2005, to Hoover Company for a the net assets of Hoover except cash. In addition, Coolidge agreed that if the market value its common stock was not $20 a share or more on September 30, 2006, a sufficient numbe of additional shares of common stock would be issued to Hoover to make the aggregate ma ket value of its Coolidge common shareholdings equal to $1 million on that date. The balance sheet of Hoover on September 30, 2005, with related cur rent fair values assets and liabilities, is as follows:

CHECK FIGURE

HOOVER COMPANY

a. Debit patent, $95,000.

Balance Sheet (prior to business combination) September 30, 2005

Curren Fair Val

Carrying Amounts

You're Reading a Preview Assets Cash

Unlock Trade accounts receivable (net) full access with a free trial.

$ 100,000

$ 10

300,000 520,000

30 68

20,000

2

180,000 500,000

18 65

1,000,000 80,000

1,25 10

Inventories Short-term prepaymentsDownload With Free 10% investment in Truman Company common stock (long-term, available for sale) Land

Trial

Other plant assets (net) Patent (net)

Total assets $2,700,000 Master your semester with Scribd Read Free Foron 30this Days Sign up to vote title Liabilities and Stockholders’ & The New York Times  UsefulEquity  Not useful Current liabilities $ 700,000


Long-term debt C k $5

Cancel anytime.

500,000 600 000

  $ 70 48

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Instructions

a. Prepare the September 30, 2005, journal entries for Coolidge Corporation to re foregoing transactions and events. (Disregard income taxes.)

b. Assume that on September 30, 2006, the market value of Coolidge Corporation mon stock was $16 a share. Prepare a journal entry to record the issuance of ad shares of Coolidge common stock to Hoover Company on that date and the pay cash in lieu of fractional shares, if any.

(Problem 5.11)

The board of directors of Solo Corporation is considering a merger with Mono Co The most recent financial statements and other financial data for the two compani of which use the same accounting principles and practices, are shown below:

CHECK FIGURE

SOLO CORPORATION AND MONO COMPANY

Basic earnings per share, $3.00.

Balance Sheets (prior to business combination) October 31, 2005

Solo Corporation Assets Current assets

$ 500,000


Plant assets (net) Other assets Unlock full access with a free trial.

1,000,000 300,000

Total assets

$1,800,000

Download With Freeand Trial Liabilities Stockholders’ Equity Current liabilities Long-term debt Common stock, $10 par

$ 400,000 500,000 600,000

Additional paid-in capital Retained earnings

Master your semester Total with Scribd liabilities and stockholders’ equity & The New York Times Special offer for students: Only $4.99/month.

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SOLO CORPORATION AND MONO COMPANY Statements of Income and Retained Earnings (prior to business combination)

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