Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
1–1
CHAPTER 1
UNDERSTANDING THE ISSUES
1. (a) Product extension—manufacturer ex-
pands product lines in boating industry.
(b) Vertical forward—manufacturer buys
distribution outlets
(c) Conglomerate—unrelated businesses
2. By accepting cash in exchange for the net
were sold.
3. Identifiable assets (fair value) .. $600,000
Deferred tax liability
($200,000 × 40%) .................. (80,000)
4. (a) The net assets and goodwill will be
recorded at their full fair value on the
5. Puncho will record the net assets at their
fair value of $800,000 on its books. Also,
a gain on the sale of business of $500,000
($900,000 – $400,000).
6. (a) Value Analysis:
Price paid ............................... $800,000
Total ....................................... $800,000
Customer list (fair value) ........ 20,000
Liabilities (fair value) .............. (100,000)
Gain ........................................ (70,000)
Total ....................................... $450,000
(a) The equipment and building will be re-
stated at $180,000 and $550,000 on
($180,000/5) per year. The adjustment
for 2015 is for a half year. 2015 depre-
1–2
(c) Originally, depreciation on the building
is $25,000 ($500,000/20) per year.
It will be recalculated as $27,500
8. Fair value of operating unit ...... $1,200,000
Book value including goodwill .. 1,250,000
Goodwill is impaired.
9. (a) An estimated liability should have been
recorded on the purchase date. Any dif-
ference between that estimate and the
(c) Since this agreement is based on is-
suance of additional shares based on a
decrease in value, it is recorded as a
and possibly reduced in future periods.
Under IFRS, it would be amortized over
some number of future periods.
1–3 Ch. 1—Exercises
EXERCISES
EXERCISE 1-1
(1) Current Assets .......................................................................... 85,000
Land .......................................................................................... 90,000
Building ..................................................................................... 300,000
(2) Cash ......................................................................................... 875,000
Liabilities ................................................................................... 100,000
Accumulated Depreciation—Building ....................................... 200,000
(3) Investment in Crown Company ................................................ 875,000
Cash ................................................................................... 875,000
Ch. 1—Exercises 1–4
EXERCISE 1-2
Cash ................................................................................................. 100,000
Inventory .......................................................................................... 270,000
Equipment ........................................................................................ 220,000
Land ................................................................................................. 180,000
Buildings .......................................................................................... 300,000
Goodwill* .......................................................................................... 515,000
Discount on Bonds Payable ............................................................. 75,000
EXERCISE 1-3
Accounts Receivable ....................................................................... 100,000
Inventory .......................................................................................... 210,000
Equipment for Resale ($200,000 less 10%) .................................... 180,000
Land ................................................................................................. 200,000
*Total consideration:
Common stock (100,000 shares × $20) ..................................... $2,000,000
Less fair value of net assets acquired:
Accounts receivable ............................................................. $ 100,000
Inventory .............................................................................. 210,000
Equipment for resale ($200,000 less 10%) .......................... 180,000
Land ..................................................................................... 200,000
Building ................................................................................ 450,000
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
EXERCISE 1-4
Accounts Receivable ....................................................................... 200,000
Inventory .......................................................................................... 270,000
Equipment ....................................................................................... 40,000
Brand-Name Copyright .................................................................... 15,000
Cash ........................................................................................... 160,000
Current Liabilities ....................................................................... 80,000
1–7 Ch. 1—Exercises
EXERCISE 1-5
(1) Adjustments:
Final value of manufacturing plant ............................................................. $700,000
Provisional value of manufacturing plant ................................................... 600,000
Total increase ............................................................................................ $100,000
(2) Balance Sheet
December 31, 2015 (revised)
Current assets ............... $ 300,000 Current liabilities ................... $ 300,000
Equipment (net) ............. 600,000 Bonds payable ...................... 500,000
Plant assets (net) ........... 1,695,000 Common stock ($1 par) ........ 50,000
EXERCISE 1-6
Machine = $200,000
Deferred tax liability = $16,800
In this tax-free exchange, depreciation on $56,000 [($200,000 appraised value) – ($144,000*
net book value)] of the machine’s value is not deductible on future tax returns. The additional tax
EXERCISE 1-7
Current Assets ................................................................................. 100,000
Equipment ........................................................................................ 200,000
Building ............................................................................................ 270,000
Deferred Tax Asset .......................................................................... 90,000
1–9 Ch. 1—Exercises
EXERCISE 1-8
(1) Estimated Liability for Contingent Consideration (original account) 40,000
Loss on Estimated Contingent Consideration........................... 20,000
(2) Paid in Capital, Contingent Share Agreement (original account) 40,000
Common stock, $1 par ........................................................ 12,000
(3) Estimated Liability for Contingent Consideration (original account) 40,000
Loss on Estimated Contingent Consideration ..................... 60,000
EXERCISE 1-9
(1) Purchase price ................................................................................................. $600,000
(2) (a) Estimated fair value of business unit ......................................................... $520,000
Book value of Anton net assets, including goodwill ................................... $500,000
No impairment exists.
(b) Estimated fair value of business unit ......................................................... $400,000
Ch. 1—Exercises 1–10
APPENDIX EXERCISE
EXERCISE 1A-1
(1) Calculation of Earnings in Excess of Normal:
Average operating income:
2011 ........................................................................ $ 90,000
2012 ........................................................................ 110,000
2013 ........................................................................ 120,000
Less normal return on assets at fair value:
Accounts receivable ........................................... $100,000
Inventory ............................................................. 125,000
Land ................................................................... 100,000
(b) Capitalize the perpetual yearly earnings at 12%:
Goodwill = Rate tionCapitaliza
Earnings Excess Yearly
(c) Present value of a $5,000 annuity capitalized at 16%. The correct present value factor
is found in the “present value of an annuity of $1” table, at 16% for 5 periods. This factor
(2) The goodwill recorded would be $15,000. The journal entry (not required) would be as
follows:
Accounts Receivable ................................................................ 100,000
1–11 Ch. 1—Problems
PROBLEMS
PROBLEM 1-1
(1) Acquisition price $540,000
Total consideration:
Cash ..................................................................................... $540,000
Less fair value of net assets acquired:
Accounts receivable ............................................................. $ 79,000
Inventory .............................................................................. 98,000
Other current assets ............................................................. 55,000
Equipment ............................................................................ 340,000
Journal Entry:
Accounts Receivable ............................................................ 79,000
Inventory .............................................................................. 98,000
Other Current Assets ........................................................... 55,000
Equipment ............................................................................ 340,000
Problem 1-1, Concluded
(2) Acquisition price $350,000
Total consideration:
Cash ..................................................................................... $350,000
Less fair value of net assets acquired:
Accounts receivable ............................................................. $ 79,000
Inventory .............................................................................. 98,000
Other current assets ............................................................. 55,000
Equipment ........................................................................... 340,000
1–13 Ch. 1—Problems
PROBLEM 1-2
Total consideration for Vicker:
Common stock (30,000 shares × $40) ....................................... $1,200,000
Less fair value of net assets acquired:
Accounts receivable ................................................................... $ 200,000
Inventory .................................................................................... 190,000
Land ........................................................................................... 300,000
Buildings..................................................................................... 450,000
Problem 1-2, Concluded
Total consideration for Kendal:
Common stock (15,000 shares × $40) ....................................... $600,000
Less fair value of net assets acquired:
Accounts receivable ................................................................... $ 80,000
Inventory .................................................................................... 100,000
Land ........................................................................................... 80,000
Bar entry to record the purchase of Kendal:
Accounts Receivable .................................................................. 80,000
Inventory .................................................................................... 100,000
Land ........................................................................................... 80,000
PROBLEM 1-3
(1) Total consideration for Yount:
Cash ..................................................................................... $730,000
Less fair value of net assets acquired:
Cash equivalents .................................................................. $ 100,000
Accounts receivable ............................................................. 120,000
(2) Pro Forma Income:
Combined Income
Sales ..................................................................................................... $ 200,000
Less:
Cost of goods sold ($120,000 + $20,000 additional for inventory
valuation) .................................................................................... (140,000)
PROBLEM 1-4
(1) $500,000 consideration
Total consideration for Williams:
Common stock (20,000 shares × $25) ................................. $500,000
Less fair value of net assets acquired:
Accounts receivable ............................................................. $ 50,000
Inventory .............................................................................. 250,000
Land ..................................................................................... 40,000
(2) $385,000 consideration
Total consideration for Williams:
Cash ..................................................................................... $385,000
Less fair value of net assets acquired:
Accounts receivable ............................................................. $ 50,000
Inventory .............................................................................. 250,000
Land ..................................................................................... 40,000
1–17 Ch. 1—Problems
PROBLEM 1-5
Total consideration for Jack:
Common stock (18,000 shares × $270) ..................................... $4,860,000
Less fair value of net assets acquired:
Investments ................................................................................ $ 400,500
Accounts receivable ................................................................... 925,000
Inventory .................................................................................... 1,200,000
Journal Entry:
Investments ................................................................................ 400,500
Accounts Receivable .................................................................. 925,000
Inventory .................................................................................... 1,200,000
Prepaid Insurance ...................................................................... 18,000
