Solution
Robert answered on
Dec 24 2021
CHAPTER 2
Chapter 2
Consolidation of Financial Information
Answers to Questions
1.
A business combination is the process of forming a single economic entity by the uniting of two or more organizations under common ownership. The term also refers to the entity that results from this process.
2.
(1) A statutory merger is created whenever two or more companies come together to form a business combination and only one remains in existence as an identifiable entity. This a
angement is often instituted by the acquisition of substantially all of an enterprise’s assets. (2) a statutory merger can also be produced by the acquisition of a company’s capital stock. This transaction is labeled a statutory merger if the acquired company transfers its assets and liabilities to the buyer and then legally dissolves as a corporation. (3) A statutory consolidation results when two or more companies transfer all of their assets or capital stock to a newly formed corporation. The original companies are being “consolidated” into the new entity. (4) A business combination is also formed whenever one company gains control over another through the acquisition of outstanding voting stock. Both companies retain their separate legal identities although the common ownership indicates that only a single economic entity exists.
3.
Consolidated financial statements represent accounting information gathered from two or more separate companies. This data, although accumulated individually by the organizations, is
ought together (or consolidated) to describe the single economic entity created by the business combination.
4.
Companies that form a business combination will often retain their separate legal identities as well as their individual accounting systems. In such cases, internal financial data continues to be accumulated by each organization. Separate financial reports may be required for outside shareholders (a noncontrolling interest), the government, debt holders, etc. This information may also be utilized in corporate evaluations and other decision making. However, the business combination must periodically produce consolidated financial statements encompassing all of the companies within the single economic entity. A worksheet is used to organize and structure this process. The worksheet allows for a simulated consolidation to be ca
ied out on a regular, periodic basis without affecting the financial records of the various component companies.
5.
Several situations can occur in which the fair value of the 50,000 shares being issued might be difficult to ascertain. These examples include:
· The shares may be newly issued (if Jones has just been created) so that no accurate value has yet been established;
· Jones may be a closely held corporation so that no fair value is available for its shares;
· The number of newly issued shares (especially if the amount is large in comparison to the quantity of previously outstanding shares) may cause the price of the stock to fluctuate widely so that no accurate fair value can be determined during a reasonable period of time;
· Jones’ stock may have historically experienced drastic swings in price. Thus, a quoted figure at any specific point in time may not be an adequate or representative value for long-term accounting purposes.
6.
For combinations resulting in complete ownership, the acquisition method allocates the fair value of the consideration transfe
ed to the separately recognized assets acquired and liabilities assumed based on their individual fair values.
7.
The revenues and expenses (both cu
ent and past) of the parent are included within reported figures. However, the revenues and expenses of the subsidiary are only consolidated from the date of the acquisition forward. The operations of the subsidiary are only applicable to the business combination if earned subsequent to its creation.
8.
Morgan’s additional purchase price may be attributed to many factors: expected synergies between Morgan’s and Jennings’ assets, favorable earnings projections, competitive bidding to acquire Jennings, etc. In general however, under the acquisition method, any amount paid by the parent company in excess of the fair values of the subsidiary’s net assets is reported as goodwill.
9.
All of the subsidiary’s asset and liability accounts are usually recorded at fair value (see Answer 6 above). Under the acquisition method, in the vast majority of cases the assets acquired and liabilities assumed in a business combination are recorded at their fair values. If the fair value of the consideration transfe
ed (including any contingent consideration) is less than the total net fair value assigned to the assets acquired and liabilities assumed, then an ordinary gain is recognized for the difference.
10.
Shares issued are recorded at fair value as if the stock had been sold and the money obtained used to acquire the subsidiary. The Common Stock account is recorded at the par value of these shares with any excess amount attributed to additional paid-in capital.
11.
Under the acquisition method, direct combination costs are not considered part of the fair value of the consideration transfe
ed and thus are not included in the purchase price. These direct combination costs are allocated to expense in the period in which they occur. Stock issue costs are treated under the acquisition method in the same way as under the purchase method, i.e., as a reduction of APIC.
Answers to Acquisition Method Problems
1.
B
2.
D
3.
B
4.
A
5.
D
6.
A
7.
B
Consideration transfe
ed (fair value)
$800,000
Fair value of identifiable assets
Cash
$150,000
A/R
140,000
Software
320,000
In-process R&D
200,000
Liabilities
(130,000)
Fair value of net identifiable assets acquired
680,000
Goodwill
$120,000
8.
C
Atkins records new shares at fair value
Value of shares issued (51,000 × $3)
$153,000
Par value of shares issued (51,000 × $1)
51,000
Additional paid-in capital (new shares)
$102,000
Additional paid-in capital (existing shares)
90,000
Consolidated additional paid-in capital
$192,000
At the date of acquisition, the parent makes no change to retained earnings.
9.
B
Consideration transfe
ed (fair value)
$400,000
Book value of subsidiary (assets minus liabilities)
(300,000)
Fair value in excess of book value
100,000
Allocation of excess fair over book value
identified with specific accounts:
Inventory
30,000
Patented technology
20,000
Buildings and equipment
25,000
Long-term liabilities
10,000
Goodwill
$15,000
10.
A
Only the subsidiary’s post-acquisition income is included in consolidated totals.
11.
a.
From SFAS 141R an intangible asset acquired in a business combination shall be recognized as an asset apart from goodwill if it arises from contractual or other legal rights (regardless of whether those contractual or legal rights are transferable or separable from the acquired enterprise or from other rights and obligations). If an intangible asset does not arise from contractual or other legal rights, it shall be recognized as an asset apart from goodwill only if it is separable, that is, it is capable of being separated or divided from the acquired enterprise and sold, transfe
ed, licensed, rented, or exchanged (regardless of whether there is an intent to do so). An intangible asset that cannot be sold, transfe
ed, licensed, rented, or exchanged individually is considered separable if it can be sold, transfe
ed, licensed, rented, or exchanged with a related contract, asset, or liability.
.
Trademarks—usually meet both the separability and legal/contractual criteria.
A customer list—usually meets the separability criterion.
Copyrights on artistic materials—usually meet both the separability and legal/contractual criteria.
Agreements to receive royalties on leased intellectual property—usually meet the legal/contractual criterion.
Unpatented technology—may meet the separability criterion if capable of being sold even if in conjunction with a related contract, asset, or liability.
12. (15 Minutes) (Consolidated balances)
In acquisitions, the fair values of the subsidiary's assets and liabilities are consolidated (there are a limited number of exceptions). Goodwill is reported as $80,000, the amount that the $760,000 consideration transfe
ed exceeds the $680,000 fair value of Sun’s net assets acquired.
· Inventory = $670,000 (Pa
ot's book value plus Sun's fair value)
· Land = $710,000 (Pa
ot's book value plus Sun's fair value)
· Buildings and equipment = $930,000 (Pa
ot's book value plus Sun's fair value)
· Franchise agreements = $440,000 Pa
ot's book value plus Sun's fair value)
· Goodwill = $80,000 (calculated above)
· Revenues = $960,000 (only parent company operational figures are reported at date of acquisition)
· Additional Paid‑in Capital = $65,000 (Pa
ot's book value less stock issue costs)
· Expenses = $940,000 (only parent company operational figures plus acquisition-related costs are reported at date of acquisition)
· Retained Earnings, 1/1 = $390,000 (Pa
ot's book value)
13.
(20 Minutes) (Determine selected consolidated balances)
Under the acquisition method, the shares issued by Wisconsin are recorded at fair value:
Investment in Badger (value of debt and shares issued)
900,000
Common Stock (par value)
150,000
Additional Paid‑in Capital (excess over par value)
450,000
Liabilities
300,000
The payment to the
oker is accounted for as an expense. The stock issue cost is a reduction in additional paid‑in capital.
Professional services expense
30,000
Additional Paid‑in Capital
40,000
Cash
70,000
Allocation of Acquisition-Date Excess Fair Value:
Consideration transfe
ed (fair value) for Badger Stock
$900,000
Book Value of Badger, 6/30
770,000
Fair Value in Excess of Book Value
$130,000
13. (continued)
Excess fair value (undervalued equipment)
100,000
Excess fair value (overvalued patented technology)
(20,000)
Goodwill
$50,000
CONSOLIDATED BALANCES:
· Net income (adjusted for combination expenses. The
figures earned by the subsidiary prior to the takeover
are not included)
$ 210,000
· Retained Earnings, 1/1 (the figures earned by the subsidiary
prior to the takeover are not included)
800,000
· Patented Technology (the parent's book value plus the fair
value of the subsidiary)
1,180,000
· Goodwill (computed above)
50,000
· Liabilities (the parent's book value plus the fair value
of the subsidiary's debt plus the debt issued by the parent
in acquiring the subsidiary)
1,210,000
· Common Stock (the parent's book value after recording
the newly‑issued shares)
510,000
· Additional Paid‑in Capital (the parent's book value
after recording the two entries above)
680,000
14.
(50 Minutes) (Determine consolidated balances for a bargain purchase.)
Prove those figures with a worksheet)
a.
Marshall’s acquisition of Tucker represents a bargain purchase because the fair value of the net assets acquired exceeds the fair value of the consideration transfe
ed as follows:
Fair value of consideration transfe
ed
$400,000
Fair value of net assets acquired
515,000
Gain on bargain purchase
$115,000
In a bargain purchase, the acquisition is recorded at the fair value of the net assets acquired instead of the fair value of the consideration transfe
ed (an exception to the general rule).
Prior to preparing a consolidation worksheet, Marshall records the three transactions that occu
ed to create the business combination.
Investment in Tucke
515,000
Long‑Term Liabilities
200,000
Common Stock (par value)
20,000
Additional...