2011 Pearson Education, Inc.

publishing as Prentice Hall

1-1
Chapter 1

BUSINESS COMBINATIONS

Answers to Questions

1 A business combination is a union of business entities in which two or more previously separate and
independent companies are brought under the control of a single management team. Three situations
establish the control necessary for a business combination, namely, when one or more corporations become
subsidiaries, when one company transfers its net assets to another, and when each combining company
transfers its net assets to a newly formed corporation.

2 The dissolution of all but one of the separate legal entities is not necessary for a business combination. An
example of one form of business combination in which the separate legal entities are not dissolved is when
one corporation becomes a subsidiary of another. In the case of a parent-subsidiary relationship, each
combining company continues to exist as a separate legal entity even though both companies are under the
control of a single management team.

3 A business combination occurs when two or more previously separate and independent companies are
brought under the control of a single management team. Merger and consolidation in a generic sense are
frequently used as synonyms for the term business combination. In a technical sense, however, a merger is
a type of business combination in which all but one of the combining entities are dissolved and a
consolidation is a type of business combination in which a new corporation is formed to take over the
assets of two or more previously separate companies and all of the combining companies are dissolved.

4 Goodwill arises in a business combination accounted for under the acquisition method when the cost of the
investment (fair value of the consideration transferred) exceeds the fair value of identifiable net assets
acquired. Under GAAP, goodwill is not amortized for financial reporting purposes and will have no effect
on net income, unless the goodwill is deemed to be impaired. If goodwill is impaired, a loss will be
recognized.

5 A bargain purchase occurs when the acquisition price is less than the fair value of the identifiable net assets
acquired. The acquirer records the gain from a bargain purchase as an ordinary gain during the period of
the acquisition. The gain equals the difference between the investment cost and the fair value of the
identifiable net assets acquired.



1-2 Business Combinations

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
SOLUTIONS TO EXERCISES

Solution E1-1

1 a
2 b
3 a
4 d


Solution E1-2 [ AI CPA adapt ed]

1 a
Pl ant and equi pment shoul d be r ecor ded at t he $220, 000 f ai r val ue.

2 c
I nvest ment cost $1, 600, 000

Less: Fai r val ue of net asset s
Cash $ 160, 000
I nvent or y 380, 000

Pr oper t y and equi pment net
1, 120, 000
Li abi l i t i es ( 360, 000) 1, 300, 000
Goodwi l l $ 300, 000


Solution E1-3

Stockholders equity Pal Corporation on January 2

Capi t al st ock, $10 par , 600, 000 shar es out st andi ng $ 6, 000, 000

Ot her pai d- i n capi t al
[ $400, 000 + $3, 000, 000 $10, 000] 3, 390, 000

Ret ai ned ear ni ngs[ $1, 200, 000 - $20, 000] 1, 180, 000
Tot al st ockhol der s equi t y $10, 570, 000

Entry to record combination

I nvest ment i n Si p 6, 000, 000
Capi t al st ock, $10 par 3, 000, 000
Ot her pai d- i n capi t al 3, 000, 000

I nvest ment expense 20, 000
Ot her pai d- i n capi t al 10, 000
Cash 30, 000

Check: Net asset s per books( book val ue) $ 7, 600, 000
Goodwi l l and wr i t e- up asset s 3, 000, 000
Less: Expense of di r ect cost s ( 20, 000)
Less: I ssuance of st ock ( 10, 000)
$10, 570, 000


Chapter 1 1-3

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E1-4

Journal entries on Pans books to record the acquisition

I nvest ment i n Set 10, 200, 000
Common st ock, $10 par 4, 800, 000
Addi t i onal pai d- i n capi t al 5, 400, 000
To r ecor d i ssuance of 480, 000 shar es of $10 par common st ock wi t h a f ai r
val ue of $10, 200, 000 f or t he common st ock of Set i n a busi ness
combi nat i on.

Addi t i onal pai d- i n capi t al 60, 000
I nvest ment expenses 100, 000
Sal ar y and over head expenses 80, 000
Ot her asset s or cash 240, 000
To r ecor d cost s of r egi st er i ng and i ssui ng secur i t i es as a r educt i on of pai d-
i n capi t al , and r ecor d di r ect and i ndi r ect cost s of combi nat i on as
expenses.

Cur r ent asset s 4, 400, 000
Pl ant asset s 8, 800, 000
Li abi l i t i es 1, 200, 000
I nvest ment i n Set
Gai n f r ombar gai n pur chase
10, 200, 000
1, 800, 000

To r ecor d al l ocat i on of t he $10, 200, 000 cost of Set Company t o i dent i f i abl e
asset s and l i abi l i t i es accor di ng t o t hei r f ai r val ues and t he gai n f r om
t he bar gai n pur chase. The gai n f r ombar gai n pur chase i s comput ed as
f ol l ows:
Cost $10, 200, 000
Fai r val ue of net asset s acqui r ed 12, 000, 000
Bar gai n pur chase amount $ 1, 800, 000

















1-4 Business Combinations

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E1-5

Journal entries on the books of Pan Corporation to record merger with Sis
Corporation

I nvest ment i n Si s 1, 060, 000
Common st ock, $10 par 360, 000
Addi t i onal pai d- i n capi t al 300, 000
Cash 400, 000
To r ecor d i ssuance of 36, 000 common shar es and payment of cash i n t he
acqui si t i on of Si s Cor por at i on i n a mer ger .

I nvest ment expenses 140, 000
Addi t i onal pai d- i n capi t al 60, 000
Cash 200, 000
To r ecor d cost s of r egi st er i ng and i ssui ng secur i t i es and addi t i onal
di r ect cost s of combi nat i on.

Cash 80, 000
I nvent or i es 200, 000
Ot her cur r ent asset s 40, 000
Pl ant asset s net
560, 000
Goodwi l l 320, 000
Cur r ent l i abi l i t i es 60, 000
Ot her l i abi l i t i es 80, 000
I nvest ment i n Si s 1, 060, 000
To r ecor d al l ocat i on of cost t o asset s r ecei ved and l i abi l i t i es assumed
on t he basi s of t hei r f ai r val ues and t o goodwi l l comput ed as f ol l ows:

Cost of i nvest ment $1, 060, 000
Fai r val ue of net asset s acqui r ed 740, 000
Goodwi l l $ 320, 000

Chapter 1 1-5

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
SOLUTIONS TO PROBLEMS

Solution P1-1

Preliminary computations
Fai r Val ue: Cost of i nvest ment i n San at J anuar y 2
( 60, 000 shar es $40)
$2, 400, 000
Book val ue of net asset s ( $2, 000, 000 - $240, 000)
( 1, 760, 000)
Excess f ai r val ue over book val ue $ 640, 000

Excess assi gned t o:
Cur r ent asset s $160, 000
Remai nder t o goodwi l l 480, 000
Excess f ai r val ue over book val ue $640, 000

Not e: $100, 000 di r ect cost s of combi nat i on ar e expensed. The
excess f ai r val ue of Pi n s bui l di ngs i s not consi der ed.




Pin Corporation
Bal ance Sheet at J anuar y 2, 2011

Assets

Cur r ent asset s
( $520, 000 + $240, 000 + $160, 000 excess - $160, 000 di r ect cost s) $ 760, 000

Land ( $200, 000 + $400, 000) 600, 000

Bui l di ngs net ( $1, 200, 000 + $400, 000)
1, 600, 000

Equi pment net ( $880, 000 + $960, 000)
1, 840, 000

Goodwi l l 480, 000
Tot al asset s $ 5, 280, 000

Liabilities and Stockholders Equity

Cur r ent l i abi l i t i es ( $200, 000 + $240, 000) $ 440, 000

Capi t al st ock, $10 par ( $2, 000, 000 + $600, 000 new i ssue) 2, 600, 000

Addi t i onal pai d- i n capi t al
[ $200, 000 + ( $30 60, 000 shar es) $60, 000 cost s of i ssui ng
and r egi st er i ng secur i t i es]
1, 940, 000

Ret ai ned ear ni ngs ( subt r act $100, 000 expensed di r ect cost ) 300, 000
Tot al l i abi l i t i es and st ockhol der s equi t y $ 5, 280, 000

1-6 Business Combinations

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P1-2

Preliminary computations
Fai r Val ue: Cost of acqui r i ng Sea $1, 650, 000
Fai r val ue of asset s acqui r ed and l i abi l i t i es assumed 1, 340, 000
Goodwi l l f r omacqui si t i on of Sea $ 310, 000



Pet Corporation
Bal ance Sheet
at J anuar y 2, 2011

Assets

Current assets

Cash [ $300, 000 + $60, 000 - $280, 000 expenses pai d] $ 80, 000

Account s r ecei vabl e net [ $460, 000 + $80, 000 f ai r val ue]
540, 000

I nvent or i es [ $1, 040, 000 + $240, 000 f ai r val ue] 1, 280, 000

Plant assets

Land [ $800, 000 + $300, 000 f ai r val ue] 1, 100, 000

Bui l di ngs net [ $2, 000, 000 + $600, 000 f ai r val ue]
2, 600, 000

Equi pment net [ $1, 000, 000 + $500, 000 f ai r val ue]
1, 500, 000

Goodwi l l 310, 000
Tot al asset s $7, 410, 000

Liabilities and Stockholders Equity

Liabilities

Account s payabl e [ $600, 000 + $80, 000] $ 680, 000

Not e payabl e [ $1, 200, 000 + $360, 000 f ai r val ue] 1, 560, 000

Stockholders equity

Capi t al st ock, $10 par [ $1, 600, 000 + ( 66, 000 shar es $10) ]
2, 260, 000

Ot her pai d- i n capi t al
[ $1, 200, 000 - $80, 000 + ( $1, 650, 000 - $660, 000) ] 2, 110, 000

Ret ai ned ear ni ngs ( subt r act $200, 000 expensed di r ect cost s) 800, 000
Tot al l i abi l i t i es and st ockhol der s equi t y $7, 410, 000

Chapter 1 1-7

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P1-3

Par issues 25,000 shares of stock for Sins outstanding shares

1a I nvest ment i n Si n 1, 500, 000
Capi t al st ock, $10 par 250, 000
Addi t i onal pai d- i n capi t al 1, 250, 000
To r ecor d i ssuance of 25, 000, $10 par shar es wi t h a mar ket pr i ce
of $60 per shar e i n a busi ness combi nat i on wi t h Si n.
I nvest ment expenses 60, 000
Addi t i onal pai d- i n capi t al 40, 000
Cash 100, 000
To r ecor d cost s of combi nat i on i n a busi ness combi nat i on wi t h Si n.
Cash 20, 000
I nvent or i es 120, 000
Ot her cur r ent asset s 200, 000
Land 200, 000

Pl ant and equi pment net
700, 000
Goodwi l l 360, 000
Li abi l i t i es 100, 000
I nvest ment i n Si n 1, 500, 000

To assi gn i nvest ment cost t o i dent i f i abl e asset s and l i abi l i t i es
accor di ng t o t hei r f ai r val ues and t he r emai nder t o goodwi l l .
Goodwi l l i s comput ed: $1, 500, 000 cost - $1, 140, 000 f ai r val ue of
net asset s acqui r ed.



1b Par Corporation
Bal ance Sheet
J anuar y 2, 2011
( af t er busi ness combi nat i on)

Assets
Cash [ $240, 000 + $20, 000 - $100, 000] $ 160, 000
I nvent or i es [ $100, 000 + $120, 000] 220, 000
Ot her cur r ent asset s [ $200, 000 + $200, 000] 400, 000
Land [ $160, 000 + $200, 000] 360, 000

Pl ant and equi pment net [ $1, 300, 000 + $700, 000]
2, 000, 000
Goodwi l l 360, 000
Tot al asset s $3, 500, 000

Liabilities and Stockholders Equity
Li abi l i t i es [ $400, 000 + $100, 000] $ 500, 000
Capi t al st ock, $10 par [ $1, 000, 000 + $250, 000] 1, 250, 000
Addi t i onal pai d- i n capi t al [ $400, 000 + $1, 250, 000 -
$40, 000]
1, 610, 000
Ret ai ned ear ni ngs ( subt r act $60, 000 di r ect cost s) 140, 000
Tot al l i abi l i t i es and st ockhol der s equi t y $3, 500, 000
1-8 Business Combinations

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P1-3 ( cont i nued)

Par issues 15,000 shares of stock for Sins outstanding shares

2a
I nvest ment i n Si n ( 15, 000 shar es $60)
900, 000
Capi t al st ock, $10 par 150, 000
Addi t i onal pai d- i n capi t al 750, 000
To r ecor d i ssuance of 15, 000, $10 par common shar es wi t h a mar ket
pr i ce of $60 per shar e.
I nvest ment expense 60, 000
Addi t i onal pai d- i n capi t al 40, 000
Cash 100, 000
To r ecor d cost s of combi nat i on i n t he acqui si t i on of Si n.
Cash 20, 000
I nvent or i es 120, 000
Ot her cur r ent asset s 200, 000
Land 200, 000

Pl ant and equi pment net
700, 000
Li abi l i t i es 100, 000
I nvest ment i n Si n
Gai n on bar gai n pur chase
900, 000
240, 000
To r ecor d Si n s net asset s at f ai r val ues and gai n on bar gai n
pur chase.




Fai r val ue of net asset s acqui r ed $1, 140, 000
I nvest ment cost ( Fai r val ue of consi der at i on) 900, 000
Gai n on Bar gai n Pur chase $ 240, 000


2b Par Corporation
Bal ance Sheet
J anuar y 2, 2011
( af t er busi ness combi nat i on)

Assets
Cash [ $240, 000 + $20, 000 - $100, 000] $ 160, 000
I nvent or i es [ $100, 000 + $120, 000] 220, 000
Ot her cur r ent asset s [ $200, 000 + $200, 000] 400, 000
Land [ $160, 000 + $200, 000] 360, 000

Pl ant and equi pment net [ $1, 300, 000 + $700, 000]
2, 000, 000
Tot al asset s $3, 140, 000

Liabilities and stockholders equity
Li abi l i t i es [ $400, 000 + $100, 000] $ 500, 000
Capi t al st ock, $10 par [ $1, 000, 000 + $150, 000] 1, 150, 000
Addi t i onal pai d- i n capi t al [ $400, 000 + $750, 000 -
$40, 000]
1, 110, 000
Ret ai ned ear ni ngs ( subt r act $60, 000 di r ect cost s
and add $240, 000 Gai n f r ombar gai n pur chase)
380, 000
Tot al l i abi l i t i es and st ockhol der s equi t y $3, 140, 000

Chapter 1 1-9

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P1-4

1 Schedule to allocate investment cost to assets and liabilities

I nvest ment cost ( f ai r val ue) , J anuar y 1 $300, 000

Fai r val ue acqui r ed f r omSun ( $360, 000 100%)
360, 000
Excess f ai r val ue over cost ( bar gai n pur chase gai n) $ 60, 000

Al l ocat i on:

Al l ocat i on
Cash $ 10, 000

Recei vabl es net
20, 000
I nvent or i es 30, 000
Land 100, 000

Bui l di ngs net
150, 000

Equi pment net
150, 000
Account s payabl e ( 30, 000)
Ot her l i abi l i t i es ( 70, 000)
Gai n on bar gai n pur chase ( 60, 000)
Tot al s $ 300, 000



2 Pub Corporation
Bal ance Sheet
at J anuar y 1, 2011
( af t er combi nat i on)
Assets Liabilities

Cash $ 25, 000 Account s payabl e $ 120, 000

Recei vabl es net
60, 000 Not e payabl e ( 5 year s) 200, 000
I nvent or i es 150, 000 Ot her l i abi l i t i es 170, 000
Land 145, 000 Li abi l i t i es 490, 000

Bui l di ngs net
350, 000

Equi pment net
330, 000 Stockholders Equity

Capi t al st ock, $10 par 300, 000
Ot her pai d- i n capi t al 100, 000
Ret ai ned ear ni ngs* 170, 000
St ockhol der s equi t y 570, 000
Tot al asset s $1, 060, 000 Tot al equi t i es $1, 060, 000

* Ret ai ned ear ni ngs r ef l ect s t he $60, 000 gai n on t he bar gai n pur chase.

1-10 Business Combinations

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P1-5

1 Journal entries to record the acquisition of Saw Corporation

I nvest ment i n Saw 5, 000, 000
Capi t al st ock, $10 par 1, 000, 000
Ot her pai d- i n capi t al 3, 000, 000
Cash 1, 000, 000
To r ecor d acqui si t i on of Saw f or 100, 000 shar es of common st ock
and $1, 000, 000 cash.
I nvest ment expense 200, 000
Ot her pai d- i n capi t al 100, 000
Cash 300, 000
To r ecor d payment of cost s t o r egi st er and i ssue t he shar es of
st ock ( $100, 000) and ot her cost s of combi nat i on ( $200, 000) .
Cash 480, 000
Account s r ecei vabl e 720, 000
Not es r ecei vabl e 600, 000
I nvent or i es 1, 000, 000
Ot her cur r ent asset s 400, 000
Land 400, 000
Bui l di ngs 2, 400, 000
Equi pment
1, 200, 000

Account s payabl e 600, 000
Mor t gage payabl e, 10% 1, 200, 000
I nvest ment i n Saw
Gai n on bar gai n pur chase
5, 000, 000
200, 000
To r ecor d t he net asset s of Saw at f ai r val ue and gai n on bar gai n
pur chase.




Gain on Bargain Purchase Calculation

Acqui si t i on pr i ce $5, 000, 000
Fai r val ue of net asset s acqui r ed 5, 400, 000
Gai n on bar gai n pur chase $ 400, 000


Chapter 1 1-11

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P1-5 ( cont i nued)

2 Pat Corporation
Bal ance Sheet
at J anuar y 2, 2011
( af t er busi ness combi nat i on)

Assets
Cur r ent Asset s
Cash $ 5, 180, 000

Account s r ecei vabl e net
3, 320, 000

Not es r ecei vabl e net
3, 600, 000
I nvent or i es 6, 000, 000
Ot her cur r ent asset s 1, 800, 000 $ 19, 900, 000

Pl ant Asset s
Land $ 4, 400, 000

Bui l di ngs net
20, 400, 000

Equi pment net
21, 200, 000 46, 000, 000
Tot al asset s $65, 900, 000

Liabilities and Stockholders Equity

Li abi l i t i es
Account s payabl e $ 2, 600, 000
Mor t gage payabl e, 10% 11, 200, 000 $13, 800, 000

St ockhol der s Equi t y
Capi t al st ock, $10 par $21, 000, 000
Ot her pai d- i n capi t al 18, 900, 000
Ret ai ned ear ni ngs* 12, 200, 000 52, 100, 000
Tot al l i abi l i t i es and st ockhol der s equi t y $65, 900, 000

* Subt r act $200, 000 di r ect combi nat i on cost s and add $400, 000 gai n on bar gai n
pur chase.

1-12 Business Combinations

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
RESEARCH CASE

Resear ch Case
Requi r ement 1

(Amounts in millions)
Investment in Target (1 Billion x $50) 50,000
Common Stock (1 Billion x $0.10) 100
Capital in Excess of Par Value 49,900

Cash and Cash Equivalents 2,200
Credit Card Receivables 6,966
Inventory 7,897
Other Current Assets 2,079
Land 6,952
Buildings and Improvements 26,582
Fixtures and Equipment 5,692
Computer Hardware and Software 3,090
Construction in Progress 502
Other Noncurrent Assets 829
Accumulated Other Comprehensive
Loss 581
Goodwill 26,301
Accumulated Depreciation 10,485
Accounts Payable 6,511
Accrued and Other Current Liabilities 3,120
Unsecured Debt and Other
Borrowings(short-term) 796
Nonrecourse Debt Collaterized by Credit
Card Receivables(short-term) 900
Unsecured Debt and Other
Borrowings(long-term) 10,643
Nonrecourse Debt Collaterized by Credit
Card Receivables(long-term) 4,475
Deferred Income Taxes 835
Other Noncurrent Liabilities 1,906
Investment in Target 50,000











Chapter 1 1-13

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Requi r ement 2
(Amounts in millions) Wal-Mart Target Total
Assets
Current Assets:
Cash and Cash Equivalents $7,907 $2,200 $10,107
Receivables, net 4,144 6,966 11,110
Inventories 33,160 7,897 41,057
Prepaid Expenses and Other 2,980 2,079 5,059
Current Assets of Discontinued Operations 140 140
Total Current Assets $48,331 $19,142 $67,473

Property and Equipment:
Land $22,591 $6,952 $29,543
Buildings and Improvements 77,452 26,582 104,034
Fixtures and Equipment 35,450 5,692 41,142
Transportation Equipment 2,355 2,355
Computer Hardware and Software 3,090 3,090
Construction in Progress 502 502
Total Property and Equipment 137,848 42,818 180,666
Less Accumulated Depreciation -38,304 -10,485 -48,789
Property and Equipment, Net $99,544 $32,333
$131,87
7

Property Under Capital Leases:
Property Under Capital Leases $5,669 $5,669
Less Accumulated Amortization -2,906 -2,906
Property Under Capital Leases, Net $2,763 $2,763

Goodwill(16,126 +26,301) $16,126 $42,427
Other Assets and Deferred Charges 3,942 829 4,771
Total Assets
$170,70
6
$249,31
1

1-14 Business Combinations

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l

Liabilities and Stockholders Equity
Current Liabilities:
Short-term Borrowings $523 $523
Accounts Payable 30,451 $6,511 36,962
Accrued Liabilities 18,734 3,120 21,854
Accured Income Taxes 1,365 1,365
Long-term Debt Due Within One Year 4,050 4,050
Obligations Under Capital Leases Due
Within One Year 346 346
Current Liabilities of Discontinued
Operations 92 92
Unsecured debt and Other Borrowings 796 796
Nonrecourse Debt Collaterized by Credit
Card Receivables 900 900
Total Current Liabilities $55,561

$11,327 $66,888
Long-term Liabilities:
Long-Term Debt $33,231 $33,231
Long-Term Obligations Under Capital
Leases 3,170 3,170
Deferred Income Taxes and other 5,508 $835 6,343
Unsecured Debt and Other Borrowings 10,643 10,643
Nonrecourse Debt Collaterized by Credit
Card Receivables 4,475 4,475
Other Noncurrent Liabilities 1,906 1,906
Redeemable Noncontrolling Interest 307 307
Total Long-Term Liabilities $42,216 $17,859 $60,075

Stockholders' Equity
Preferred Stock
Common Stock(100 +378) $478
Capital in Excess of Par Value(3,803+49,900) 53,703
Retained Earnings 66,638
Accumulated Other Comprehensive Loss
(70 +581) -651
Total Stockholders' Equity 120,168
Noncontrolling Interest 2,180
Total Stockholders' Equity 122,348
Total Liabilities and Stockholders' Equity
$249,31
1