PROBLEM 1-6
Total consideration for Sylvester:
Cash ………………………………………………………………………………. $580,000
Less fair value of net assets acquired:
Notes receivable ……………………………………………………………… $ 24,000
Payroll and benefit-related liabilities—Current ……………………… (12,500)
Debt maturing in one year …………………………………………………. (10,000)
Long-term debt ………………………………………………………………… (248,000)
Payroll and benefit-related liabilities—Long-Term ………………… (156,000)
Value of net identifiable assets acquired ………………………… 507,500
Patents …………………………………………………………………………… 20,000
Trade Names ………………………………………………………………….. 15,000
Goodwill …………………………………………………………………………. 72,500
Accounts Payable ………………………………………………………. 45,000
Payroll and Benefit-Related Liabilities—Current ……………… 12,500
1–19 Ch. 1—Problems
PROBLEM 1-7
(1) Total consideration for Sambo:
Cash …………………………………………………………………………. $225,000
Stock issued (15,000 shares × $20) ………………………………. 300,000
Contingent liability ($50,000 × 60%) ……………………………… 30,000
Total consideration ………………………………………………… $555,000
Accounts payable ……………………………………………………….. (63,000)
Taxes payable ……………………………………………………………. (15,000)
Interest payable ………………………………………………………….. (3,000)
Bonds payable …………………………………………………………… (220,000)
Value of net identifiable assets acquired …………………… 487,000
Vehicles …………………………………………………………………….. 25,000
Franchise ………………………………………………………………….. 70,000
Goodwill ……………………………………………………………………. 68,000
Accounts Payable ………………………………………………….. 63,000
Taxes Payable ………………………………………………………. 15,000
Problem 1-7, Concluded
(2) Revised estimate of contingent payment ($50,000 × 90%) …… $45,000
Original estimate ($50,000 × 60%) ……………………………………. 30,000
PROBLEM 1-8
Total consideration for Heinrich:
Cash ………………………………………………………………………………. $150,000
Less fair value of net assets acquired:
Accounts receivable …………………………………………………………. $ 90,000
Inventory ………………………………………………………………………… 30,000
Other current assets …………………………………………………………. 8,000
Equipment ………………………………………………………………………. 80,000
Vehicles………………………………………………………………………….. 50,000
PROBLEM 1-9
(1) Reported Income for 2015
Combined Income Statement
For the Period Ending December 31, 2015
Sales revenue ………………………………………………………………… $620,000
Cost of goods sold ………………………………………………………….. 223,000
Gross profit ……………………………………………………………………. $397,000
Selling expense ……………………………………………………………… $140,000
Administrative expenses ………………………………………………….. 172,500
Problem 1-9, Continued
Name of Acquiring Company: Faber Enterprises
Name of Acquired Company: Ann’s Tool Company
Income Statement
For the Year Ending December 31, 2015
(Tax rate expressed as 0.3 for 30%)
Faber 6 Mo. Ann’s Adjustments Combined
Income Statement Accounts Enterprises Tool Co. Debit Credit Income Statement
Sales Revenue …………………………………. (550,000) (70,000) ………….. …………… ………….. (620,000)
Cost of Goods Sold …………………………… 200,000 25,000 ………….. (1) 2,000 ………….. 223,000
Gross Profit ………………………………………. (350,000) (45,000) ………….. …………… ………….. (397,000)
Selling Expenses ………………………………. 125,000 15,000 ………….. …………… 140,000 …………..
Administrative Expenses ……………………. 150,000 22,500 ………….. …………… 172,500 …………..
Depreciation Expense—Faber …………….. 13,800 ………….. ………….. …………… 13,800 …………..
(2) New depreciation: (3) New amortization:
Building, 1/2($125,000/25 years) 2,500 Patent, (1/2($18,000/6 years) 1,500
Equipment, ½($56,000/8 years) 3,500 Computer software, ½($10,000/2years) 2,500
1–23 Ch. 1—Problems
Problem 1-9, Concluded
(2) Pro forma disclosure for 2015 as if acquisition occurred at the start of the year:
Sales revenue ($550,000 + $140,000) ………………………………………………. $ 690,000
Net income…………………………………………………………………………………….. $ 39,270
Calculation of net income:
Reported net incomes before tax ($66,600 + $1,500) …………………….. $ 68,100
*($2,500 + $3,500 + $750 + $1,500 + $2,500 + $1,000) = $11,750 × 2 = $23,500
PROBLEM 1-10
Part A1
Total consideration for Iris:
Common stock (10,000 shares × $27) ………………………………… $270,000
Less fair value of net assets acquired:
Accounts receivable …………………………………………………………. $ 15,000
Inventory ………………………………………………………………………… 40,000
Prepaid expenses ……………………………………………………………. 12,000
Investments …………………………………………………………………….. 33,000
Land ………………………………………………………………………………. 40,000
Problem 1-10, Continued
Journal Entry:
Accounts Receivable ………………………………………………………… 15,000
Inventory ………………………………………………………………………… 40,000
Prepaid Expenses ……………………………………………………………. 12,000
Investments …………………………………………………………………….. 33,000
Land ………………………………………………………………………………. 40,000
Building ………………………………………………………………………….. 85,000
1–25 Ch. 1—Problems
Problem 1-10, Concluded
Worksheet for
Pro Forma Income Statement
For the Year Ending December 31, 2016
(Tax rate expressed as 0.4 for 40%)
Garman Iris Adjustments Pro Forma Combined
Income Statement Accounts International Company Debit Credit Income Statement
Sales Revenue ………………………………………… (350,000) (125,000) ………….. …………… ………….. (475,000)
Cost of Goods Sold ………………………………….. 147,000 55,000 (3) 2,000 …………… ………….. 204,000
Gross Profit ………………………………………. (203,000) (70,000) ………….. …………… ………….. (271,000)
Selling Expenses ……………………………………… 100,000 20,000 ………….. …………… 120,000 …………..
PROBLEM 1-11
Current Assets ……………………………………………………………………… 100,000
Assets Under Operating Leases (fair) ………………………………………. 580,000
Net Investment in Direct Financing Leases* ……………………………… 710,605
Leased Equipment Under Capital Lease (fair) …………………………… 60,000
PROBLEM 1-12
Current Assets ……………………………………………………………………… 150,000
Equipment ($150,000 increase) ………………………………………………. 350,000
Land and Buildings ……………………………………………………………….. 250,000
Deferred Tax Asset ……………………………………………………………….. 54,000
Goodwill* ……………………………………………………………………………… 91,000
Bonds Payable ………………………………………………………………… 200,000
Deferred Tax Liability ………………………………………………………. 45,000
Common Stock ($10 par) ………………………………………………….. 100,000
Ch. 1—Problems 1–28
PROBLEM 1-13
(1) Total consideration for Weber:
Common stock (20,000 shares × $60 + $20,000 contingency) $1,220,000
Less fair value of net assets acquired:
Cash …………………………………………………………………………. $ 30,000
Accounts receivable ……………………………………………………. 60,000
Investment in marketable securities ………………………………. 150,000
Land …………………………………………………………………………. 450,000
Buildings ……………………………………………………………………. 450,000
Dr. = Cr. Check Totals 1,740,000 1,740,000
(2) Entry to record contingent consideration:
Paid-in capital, contingent consideration ……………………………. 20,000
1–29 Ch. 1—Problems
APPENDIX PROBLEM
PROBLEM 1A-1
(1) Bonds:
Present value of interest payments for 5 years at 8%,
$27,000 × 3.9927 ………………………………………………………………………. $107,803
Present value of principal due in 5 years at 8%,
(2) Cash and Receivables …………………………………………………….. 150,000
Inventory ……………………………………………………………………….. 200,000
Land ……………………………………………………………………………… 100,000
Ch. 1—Cases 1–30
CASES
CASE 1-1
Part A
Confirmation:
Building:
Payment ………………………………………………………………………………. $80,000
Case 1-1, Continued
Part B
(1) Discounted cash flows:
Salvage/
Period Operating Capital (Capital Expenditures) Total
1 150,000 150,000
2 165,000 165,000
3 181,500 181,500
4 199,650 199,650
5 219,615 (100,000) 119,615
6 219,615 219,615
(2) Fair value comparison:
(3) Entry to record acquisition:
Cash Equivalents ……………………………………………………………. 80,000
Inventory ……………………………………………………………………….. 150,000
Accounts Receivable ………………………………………………………. 180,000
Case 1-1, Concluded
Part C
Impairment test:
Implied fair value of Frontier …………………………………………………………. $1,200,000
Book value, including goodwill ……………………………………………………… 1,300,000
Book value exceeds implied fair value; goodwill is impaired.
Impairment adjustment:
Implied fair value of Frontier …………………………………………………………. $1,200,000
CASE 1-2
1. The acquisition would be qualified as horizontal.
2. The total price paid and its assignment are as follows:
Cash (79.2 million shares × $30) ……………………………. $2,376,000,000
Stock issued (59 million shares × $32.25) ……………….. 1,902,750,000
Total consideration ………………………………………………. $4,278,750,000
3. Journal Entry:
Cash and Cash Equivalents ………………………………………….. 105,000,000
Receivables ………………………………………………………………… 141,000,000
Capitalized Film Costs ………………………………………………….. 269,000,000