Solution manual advanced accounting 10e by fischer taylor CH01

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER UNDERSTANDING THE ISSUES (a) Horizontal combination—both are marine engine manufacturers (b) Vertical combination—manufacturer buys distribution outlets (c) Conglomerate—unrelated businesses (a) Value Analysis: Price paid $ Fair value of net assets Goodwill $ Current assets (fair value) $ Land (fair value) Building & equipment (fair value) Customer list (fair value) Liabilities (fair value) Goodwill Total $ By accepting cash in exchange for the net assets of the company, the seller would have to recognize an immediate taxable gain However, if the seller were to accept common stock of another corporation instead, the seller could construct the transaction as a tax-free reorganization The seller could then account for the transaction as a tax-free exchange The seller would not pay taxes until the shares received were sold Identifiable assets (fair value) Deferred tax liability ($200,000 × 40%) Net assets Goodwill Price paid Net assets Goodwill $600,000 (80,000) $520,000 $850,000 (520,000) $330,000 (b) Value Analysis: Price paid $ Fair value of net assets Gain $ Current assets (fair value) $ Land (fair value) Building & equipment (fair value) Customer list (fair value) Liabilities (fair value) Gain Total $ 800,000 520,000 280,000 120,000 80,000 400,000 20,000 (100,000) 280,000 800,000 450,000 520,000 (70,000) 120,000 80,000 400,000 20,000 (100,000) (70,000) 450,000 The 20X1 financial statements would be revised as they are included in the 20X2 – 20X1 comparative statements The 20X2 statements would be based on the new values The adjustments would be: (a) The net assets and goodwill will be recorded at their full fair value on the books of the parent on the date of acquisition (b) The net assets will be “marked up” to fair value, and goodwill will be recorded at the end of the fiscal year when the consolidated financial statements are prepared through the use of a consolidated worksheet (a) The equipment and building will be restated at $180,000 and $550,000 on the comparative 20X1 and 20X2 balance sheets (b) Originally, depreciation on the equipment was $40,000 ($200,000/5) per year It will be recalculated as $36,000 ($180,000/5) per year The adjustment for 20X1 is for a half year 20X1 depreciation expense and accumulated depreciation will be restated at $18,000 instead of $20,000 for the half year Depreciation expense for 20X2 will be $36,000 Puncho will record the net assets at their fair value of $800,000 on its books Also, Puncho will record goodwill of $100,000 ($900,000 – $800,000) resulting from the excess of the price paid over the fair value Semos will record the removal of its net assets at their book values Semos will record a gain on the sale of business of $500,000 ($900,000 – $400,000) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (c) Originally, depreciation on the building was $25,000 ($500,000/20) per year It will be recalculated as $27,500 ($550,000/20) per year The adjustment for 20X1 is for a half year 20X1 depreciation expense and accumulated depreciation will be restated at $13,750 instead of $12,500 for the half year Depreciation expense for 20X2 will be $27,500 (d) Goodwill is reduced $30,000 on the comparative 20X1 and 20X2 balance sheets Fair value of operating unit Book value including goodwill Goodwill is impaired Fair value of operating unit Fair value of net identifiable assets Recalculated goodwill Existing goodwill Goodwill impairment loss $ $1,200,000 1,250,000 $1,200,000 1,120,000 80,000 200,000 120,000 (a) An estimated liability should have been recorded on the purchase date Any difference between that estimate and the $100,000 paid would be recorded as a gain or loss on the liability already recorded (b) Even though the issuance is based on performance and suggests additional goodwill, no adjustment is made if additional stock is issued In this case, the paid-in capital in excess of par account is reduced for the par value of the additional shares to be issued The fair value of the stock originally issued is being devalued The entry would take the following form: Paid-In Capital in Excess of Par 10,000 Common Stock ($1 par) 10,000 (c) This agreement is also settled by issuing shares The price is not changed The paid-in capital in excess of par account is reduced for the par value of the additional shares to be issued The fair value of the stock originally issued is being devalued The entry would take the following form: Paid-In Capital in Excess of Par 5,000 Common Stock ($1 par) 5,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1—Exercises EXERCISES EXERCISE 1-1 (1) Current Assets Land Building Equipment Goodwill Liabilities Cash 100,000 75,000 300,000 275,000 152,000 Expenses (acquisition costs) Cash 15,000 (2) Cash Liabilities Accumulated Depreciation—Building Accumulated Depreciation—Equipment Current Assets Land Building Equipment Gain on Sale of Business 800,000 100,000 200,000 100,000 102,000 800,000 15,000 80,000 50,000 450,000 300,000 320,000 Note: Seller does not receive the acquisition costs (3) Investment in Crow Company Cash Expenses (acquisition costs) Cash 800,000 800,000 15,000 Note: At year-end, Crow would be consolidated with Bart, as explained in Chapter 15,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Exercises EXERCISE 1-2 Cash Inventory Equipment Land Buildings Goodwill* Discount on Bonds Payable Current Liabilities Bonds Payable Common Stock Paid-In Capital in Excess of Par 100,000 250,000 220,000 180,000 300,000 640,000 140,000 Acquisition Expense Paid-In Capital in Excess of Par Cash 25,000 10,000 *Total consideration: Common stock (60,000 shares × $20) Less fair value of net assets acquired: Cash Inventory Equipment Land Buildings Current liabilities Bonds payable Value of net identifiable assets acquired Excess of total cost over fair value of net assets (goodwill) 80,000 550,000 300,000 900,000 35,000 $1,200,000 $100,000 250,000 220,000 180,000 300,000 (80,000) (410,000) $ 560,000 640,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Exercises EXERCISE 1-3 Accounts Receivable Inventory Equipment for Resale Land Building R&D Project Customer List Goodwill* Current Liabilities Bonds Payable Warranty Liability Common Stock Paid-In Capital in Excess of Par *Total consideration: Common stock (100,000 shares × $15) Less fair value of net assets acquired: Accounts receivable Inventory Equipment for resale ($80,000 less 10%) Current liabilities Bonds payable Land Building R&D project Customer list ($100,000 payment discounted years at 20%) Estimated liability under warranty Value of net identifiable assets acquired Excess of total cost over fair value of net assets (goodwill) 100,000 210,000 72,000 200,000 450,000 90,000 210,650 477,350 80,000 200,000 30,000 100,000 1,400,000 $1,500,000 $ 100,000 210,000 72,000 (80,000) (200,000) 200,000 450,000 90,000 210,650 (30,000) $ 1,022,650 477,350 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Exercises EXERCISE 1-4 Accounts Receivable Inventory Equipment Brand-Name Copyright Cash Current Liabilities Mortgage Payable Gain on Acquisition* Acquisition Expense Cash *Total consideration: Cash Less fair value of net assets acquired: Accounts receivable Inventory Equipment Brand-name copyright Current liabilities Mortgage payable Value of net identifiable assets acquired Excess of total fair value over cost of net assets (gain) 200,000 270,000 40,000 15,000 160,000 80,000 250,000 35,000 25,000 25,000 $160,000 $ 200,000 270,000 40,000 15,000 (80,000) (250,000) $ 195,000 (35,000) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Exercises EXERCISE 1-5 (1) Adjustments: Final value of manufacturing plant Provisional value of manufacturing plant Total increase Depreciation adjustment: Depreciation on final cost ($700,000/10 years) Depreciation based on provisional cost ($600,000/10 years) Annual increase in depreciation $700,000 600,000 $100,000 $70,000 60,000 $10,000 Adjustment for half year $5,000 Journal Entries: Plant Assets Goodwill 100,000 Retained Earnings (increase depreciation for half year) Plant Assets (because they are shown net of depreciation) (2) 100,000 5,000 5,000 Balance Sheet December 31, 20X1 (revised) Current assets Equipment (net) Plant assets (net) Goodwill Total assets $ 300,000 Current liabilities 600,000 Bonds payable 1,695,000 Common stock ($1 par) 200,000 Paid-in capital in excess of par Retained earnings $2,795,000 Total liabilities and equity $ 300,000 500,000 50,000 1,300,000 645,000 $2,795, Summary Income Statement For Year Ended December 31, 20X1 (revised) Sales revenue Cost of goods sold Gross profit Operating expenses Depreciation expense Net income $800,000 520,000 $280,000 $150,000 85,000 $ 235,000 45,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Exercises 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 to be paid as a result of Lewison’s inability to deduct the excess value assigned to the machine is $16,800 ($56,000 × 30%) Goodwill = $800,000 – ($700,000 – $16,800) = $116,800 *$180,000/10 yrs × prior years = $36,000 accumulated depreciation $180,000 – $36,000 = $144,000 net book value EXERCISE 1-7 Current Assets Equipment Building Deferred Tax Asset Goodwill* Current Liabilities Cash 100,000 200,000 270,000 120,000 270,000 60,000 900,000 Price paid Less fair value of net assets: Current assets Equipment Building Recorded (current) liabilities Excess $100,000 200,000 270,000 (60,000) $ *Tax loss carryforward consideration: Deferred tax asset ($400,000 × 30%) = the value of the remaining carryforward Goodwill $ $ 900,000 510,000 390,000 (120,000) 270,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Exercises EXERCISE 1-8 (1) Liabilities 40,000 Loss on Contingent Payment 20,000 Cash 60,000 × (average income of $55,000* – $25,000) less $40,000 liability already recorded *($50,000 + $60,000)/2 = $55,000 (2) Shares issued = $60,000/$5 per share = 12,000 shares Since the contingency is settled in shares, goodwill is not increased and cash is not changed The entry to record the 12,000 additional shares issued is as follows: Paid-In Capital in Excess of Par Common Stock ($1 par) 12,000 (3) Paid-In Capital in Excess of Par Common Stock ($1 par) 50,000 Deficiency [($6 – $4) × 100,000 shares] Divide by fair value Added number of shares 12,000 50,000 ÷ $200,000 $4 50,000 EXERCISE 1-9 (1) Purchase price Fair value of net assets other than goodwill Goodwill $600,000 400,000 $200,000 The estimated value of the unit exceeds $600,000, confirming goodwill (2) (a) Estimated fair value of business unit Book value of Anton net assets, including goodwill $520,000 $500,000 No impairment exists (b) Estimated fair value of business unit Book value of Anton net assets, including goodwill $400,000 $450,000 Goodwill is impaired Estimated fair value of business units Fair value of net assets, excluding goodwill Remeasured amount of goodwill Existing goodwill Impairment loss $ $400,000 340,000 60,000 200,000 $140,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Exercises APPENDIX EXERCISE EXERCISE 1A-1 (1) Calculation of Earnings in Excess of Normal: Average operating income: 20X1 20X2 20X3 20X4 (subtract $40,000) 20X5 Less normal return on assets at fair value: Accounts receivable Inventory Land Building Equipment Fair value of total assets Industry normal rate of return Normal return on assets Expected annual earnings in excess of normal $ × 90,000 110,000 120,000 100,000 130,000 $550,000 ÷ years = $110,000 $100,000 125,000 100,000 300,000 250,000 $875,000 12% $ 105,000 5,000 (a) × $5,000 = $25,000 Goodwill (b) Capitalize the perpetual yearly earnings at 12%: Goodwill = Yearly Excess Earnings Capitalization Rate = $5,000 0.12 = $41,667 (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 periods This factor multiplied by the $5,000 yearly excess earnings will result in the present value: 3.2743 × $5,000 = $16,372 (2) The goodwill recorded would be $15,000 The journal entry (not required) would be as follows: Accounts Receivable Inventory Land Building Equipment Goodwill Cash Total Liabilities 10 100,000 125,000 100,000 300,000 250,000 15,000 690,000 200,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Problems PROBLEM 1-6 Total consideration for Sylvester: Cash Less fair value of net assets acquired: Notes receivable Accounts receivable Inventory Other current assets Investments Land Building Equipment Patents Trade Names Accounts Payable Payroll and Benefit-Related Liabilities Debt Maturing in One Year Long-Term Debt Payroll and Benefit-Related Liabilities Value of net identifiable assets acquired Excess of total cost over fair value of net assets (goodwill) Journal Entry: Notes Receivable Accounts Receivable Inventory Other Current Assets Investments Land Building Equipment Patents Trade Names Goodwill Accounts Payable Payroll and Benefit-Related Liabilities—Current Debt Maturing in One Year Long-Term Debt Payroll and Benefit-Related Liabilities—Long-Term Cash Dr = Cr Check Totals $580,000 $ 24,000 56,000 30,000 15,000 63,000 55,000 275,000 426,000 20,000 15,000 (45,000) (12,500) (10,000) (248,000) (156,000) $ 24,000 56,000 30,000 15,000 63,000 55,000 275,000 426,000 20,000 15,000 72,500 45,000 12,500 10,000 248,000 156,000 580,000 1,051,500 Acquisition Expense Cash 18 507,500 72,500 1,051,500 20,000 20,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Problems PROBLEM 1-7 (1) Total consideration for Smith: Cash Stock issued (15,000 shares × $20) Contingent liability ($50,000 × 75%) Total consideration Less fair value of net assets acquired: Notes receivable Inventory Prepaid Expenses Investments Land Buildings Equipment Vehicles Franchise Accounts payable Taxes payable Interest payable Bonds payable Value of net identifiable assets acquired Excess of total cost over fair value of net assets (goodwill) Journal Entry: Notes Receivable Inventory Prepaid Expenses Investments Discount on Bonds Payable Land Buildings Equipment Vehicles Franchise Goodwill Accounts Payable Taxes Payable Interest Payable Bonds Payable Cash Common Stock (15,000 shares × $2) Paid-In Capital in Excess of Par Estimated Contingent Liability Dr = Cr Check Totals $200,000 300,000 37,500 $537,500 $ 33,000 80,000 15,000 55,000 90,000 170,000 250,000 25,000 70,000 (63,000) (15,000) (3,000) (220,000) $ 33,000 80,000 15,000 55,000 30,000 90,000 170,000 250,000 25,000 70,000 50,500 63,000 15,000 3,000 250,000 200,000 30,000 270,000 37,500 868,500 19 487,000 50,500 868,500 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Problems Problem 1-7, Concluded (2) Revised estimate of contingent payment ($50,000 × 90%) Original estimate ($50,000 × 75%) Net increase $ Journal Entry: Loss on Estimated Contingent Liability Estimated Contingent Liability $45,000 37,500 7,500 7,500 7,500 PROBLEM 1-8 Total consideration for Jones: Cash Less fair value of net assets acquired: Accounts receivable Inventory Other current assets Equipment Vehicles Accounts payable Accrued liabilities Notes payable Value of net identifiable assets acquired Excess of fair value of net assets over price paid (gain) Journal Entry: Accounts Receivable Inventory Other Current Assets Equipment Vehicles Accounts Payable Accrued Liabilities Notes Payable Gain on Acquisition of Business Cash Dr = Cr Check Totals $150,000 $ 87,000 30,000 8,000 80,000 71,000 (56,000) (14,000) (30,000) $ 87,000 30,000 8,000 80,000 71,000 56,000 14,000 30,000 26,000 150,000 276,000 20 176,000 (26,000) 276,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Problems PROBLEM 1-9 (1) Reported income for 20X1 Combined Income Statement For the Period Ending December 31, 20X1 Sales revenue Cost of goods sold Gross profit Selling expense Administrative expenses Depreciation expense Amortization expense Income from operations Other income and expenses Income before taxes Provision for income taxes Net income 21 $620,000 223,000 $397,000 $140,000 172,500 20,550 10,600 $ $ $ 343,650 53,350 7,000 60,350 18,105 42,245 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Problems 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, 20X1 (Tax rate expressed as 0.3 for 30%) Income Statement Accounts Sales Revenue Cost of Goods Sold Gross Profit Selling Expenses Administrative Expenses Depreciation Expense—Faber Depreciation Expense—Ann’s Tool Amortization Expense—Faber Amortization Expense—Ann’s Tool Total Operating Expenses Operating Income Nonoperating Revenues and Expenses: Interest Expense Interest Income Dividend Income Total Nonoperating Revenues and Expenses Income Before Taxes Provision for Income Taxes (30%) Net Income (1) Reduce (sold) inventory to fair value Faber Mo Ann’s Adjustments Enterprises Tool Co Debit Credit (550,000) (70,000) 25,000 (1) 200,000 (350,000) (45,000) 125,000 15,000 150,000 22,500 13,800 3,750(2) 3,000 5,600 1,000(3) 4,000 42,250 294,400 (55,600) (2,750) 2,000 (7,000) (4,000) (66,600) 19,980 (46,620) (750) 225 (525) (2) New depreciation: Buildings Equipment Trucks Total new depreciation Recorded depreciation Adjustment 22 2,500 3,500 750 6,750 3,750 3,000 7,000 Combined Income Statement 2,000 140,000 172,500 13,800 6,750 5,600 5,000 223,000 343,650 (53,350 4,000 (7,000) (4,000) 2,000 (3) New amortization: Patent Computer software Copyright Total new amortization Recorded amortization Adjustment (7,000) (60,350 18,105 (42,245 1,500 2,500 1,000 5,000 1,000 4,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Problems Problem 1-9, Concluded (2) Pro forma disclosure for 20X1 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) Inventory adjustment Old Ann depreciation and amortization ($7,500 + $2,000) New Ann amortization and depreciation Adjusted income before tax Tax provision (30%) Net income $ $ $ 68,100 2,000 9,500 (23,500)* 56,100 (16,830) 39,270 *($2,500 + $3,500 + $750 + $1,500 + $2,500 + $1,000) × = $11,750 × = $23,500 PROBLEM 1-10 Part A Total consideration for Iris: Common stock (10,000 shares × $27) Less fair value of net assets acquired: Accounts receivable Inventory Prepaid expenses Investments Land Building Equipment Patent Copyright Accounts payable Interest payable Notes payable Value of net identifiable assets acquired Excess of total cost over fair value of net assets (goodwill) 23 $270,000 $ 15,000 40,000 12,000 33,000 40,000 85,000 50,000 12,000 26,000 (22,000) (2,000) (40,000) $ 249,000 21,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Problems Problem 1-10, Continued Journal Entry: Accounts Receivable Inventory Prepaid Expenses Investments Land Building Equipment Patent Copyright Goodwill Accounts Payable Interest Payable Notes Payable Common Stock (10,000 shares × $5 par) Paid-In Capital in Excess of Par ($270,000 – $50,000) 15,000 40,000 12,000 33,000 40,000 85,000 50,000 12,000 26,000 21,000 22,000 2,000 40,000 50,000 220,000 Dr = Cr Check Totals 334,000 Acquisition Expense Cash 10,000 10,000 Part B Summary disclosure: Sales revenue $475,000 Net income $28,920 24 334,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Problems Problem 1-10, Concluded Worksheet for Pro Forma Income Statement For the Year Ending December 31, 20X2 (Tax rate expressed as 0.4 for 40%:) Garman International Income Statement Accounts Iris Company Adjustments Debit Credit Sales Revenue Cost of Goods Sold Gross Profit Selling Expenses Administrative Expenses Acquisition Expense Depreciation Expense—Garman Depreciation Expense—Iris Amortization Expense—Garman Amortization Expense—Iris Total Operating Expenses Operating Income Nonoperating Revenues and Expenses: Interest Expense Investment Income Total Nonoperating Revenues and Expenses Income Before Taxes Provision for Income Taxes (40%) Net Income (350,000) (125,000) 55,000 (3) 2,000 147,000 (203,000) (70,000) 100,000 20,000 50,000 30,000 (4) 10,000 12,500 8,600(1) 400 1,000 3,900 (2) 62,500 163,500 (39,500) (7,500) 100 (12,000) (1) (2) Adjust amortization as follows: New amounts: Patent $1,200 Copyright 2,600 Total new $3,800 Recorded 3,900 Adjustment $ (100) Adjust depreciation as follows: New amounts: Building Equipment Total new Recorded Adjustment $4,000 5,000 $9,000 8,600 $ 400 3,000 (4,500) (51,500) 20,600 (30,900) 25 (9,000) 3,600 (5,400) 12,400 Pro Forma Combined Income Statement 204,000 120,000 80,000 10,000 12,500 9,000 1,000 3,800 236,300 (34,700 3,000 (16,500) 100 (3) Increase cost of goods sold to reflect fair value of beginning inventory (4) Expense acquisition costs (13,500) (48,200 19,280 (28,920 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Problems PROBLEM 1-11 Current Assets Assets Under Operating Leases (fair) Net Investment in Direct Financing Leases* Leased Equipment Under Capital Lease (fair) Buildings (fair) Land (fair) Research & Development Expense (fair) Goodwill‡ Current Liabilities Obligation Under Capital Lease of Equipment** Estimated Liabilities Under Lawsuit (estimate) Cash *Recorded net investment in direct financing leases Less adjustment for $50,000 per year lease: Present value of payments of $50,000 per year for years at 8%: $50,000 × 3.9927 Present value of payments of $50,000 per year for years at 12%: $50,000 × 3.6048 100,000 580,000 710,605 60,000 400,000 100,000 200,000 382,678 150,000 33,283 50,000 2,300,000 $730,000 $ 199,635 (180,240) **Present value of payments of $9,233 at 12%: $9,233 × 3.6048 = $33,283 ‡ Cash Value assigned to identifiable net assets Goodwill 26 $ $2,300,000 1,917,322 382,678 19,395 $710,605 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Problems PROBLEM 1-12 Current Assets Equipment ($100,000 increase) Land and Buildings Deferred Tax Asset Goodwill* Bonds Payable Deferred Tax Liability Common Stock ($10 par) Paid-In Capital in Excess of Par 150,000 300,000 250,000 36,000 94,000 200,000 30,000 100,000 500,000 Dr = Cr Check Totals 830,000 *Price paid (10,000 shares × $60 fair value) Fair value of net assets: Current assets Equipment Deferred tax liability [30% × ($300,000 – $200,000)] from deferred increase in equipment value Land and buildings Bonds payable Deferred tax asset (30% × $120,000) from carryover losses Excess attributable to goodwill (net of deferred tax liability) $600,000 $ 150,000 300,000 (30,000) 250,000 (200,000) 36,000 $ Acquisition Expense Cash 10,000 Paid-In Capital in Excess of Par Cash 3,000 27 830,000 506,000 94,000 10,000 3,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Problems PROBLEM 1-13 (1) Total consideration for Walsh: Common stock (20,000 shares × $60) Less fair value of net assets acquired: Cash Accounts receivable Investment in marketable securities Land Buildings Equipment Accounts payable Income tax payable Value of net identifiable assets acquired Excess of fair value of net assets over cost (gain) Journal Entry: Cash Accounts Receivable Investment in Marketable Securities Land Buildings Equipment Accounts Payable Income Tax Payable Gain on Acquisition Common Stock ($2 × 20,000 shares) Paid-In Capital in Excess of Par ($1,200,000 – $40,000) Dr = Cr Check Totals $1,200,000 $ 30,000 60,000 150,000 450,000 450,000 600,000 (120,000) (190,000) $ 1,430,000 (230,000) 30,000 60,000 150,000 450,000 450,000 600,000 120,000 190,000 230,000 40,000 1,160,000 1,740,000 1,740,000 (2) A footnote disclosure of the contingent liability of Door Corporation must be made on the December 31, 20X1, financial statements, even though the fair value of the stock is currently greater than the value on the date of issue (3) Entry to record contingent consideration: Paid-In Capital in Excess of Par Common Stock (870 shares × $2) Amount of consideration = deficiency in price × shares: $2.50 × 20,000 shares = $50,000 Number of new shares needed: $50,000 = 870 shares $57.50 per share 28 1,740 1,740 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Problems APPENDIX PROBLEM PROBLEM 1A-1 (1) Bonds Present value of interest payments for years at 8%, $27,000 × 3.9927 Present value of principal due in years at 8%, $300,000 × 0.6806 Present value of bonds $107,803 204,180 $311,983 Goodwill Expected return ($120,000 + $140,000 + $150,000 + $160,000 + $180,000) ÷ Normal return on assets ($150,000 + $200,000 + $100,000 + $600,000) × 10% Profit in excess of normal return Present value of excess of normal return for years at 16%, $45,000 × 3.2743 (2) Cash and Receivables Inventory Land Building Goodwill Current Liabilities 9% Bonds Payable Premium on Bonds Payable Cash 29 $150,000 $ 105,000 45,000 $147,344 150,000 200,000 100,000 600,000 147,344 120,000 300,000 11,983 765,361 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Cases CASES CASE 1-1 Part A Confirmation: Building: Payment n Rate $80,000 20 0.14 Present value Land (20 acres × $10,000) Balance, building $529,850 (200,000) $329,850 Patent: Payment n Rate Present value $40,000 0.2 $103,549 Mortgage payable: Payment n Rate Present value $50,000 0.07 $205,010 30 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Cases Case 1-1, Continued Part B (1) Discounted cash flows: Period 10 11 12 13 14 15 16 17 18 19 20 Operating Capital 150,000 165,000 181,500 199,650 219,615 219,615 219,615 219,615 219,615 219,615 219,615 219,615 219,615 219,615 219,615 219,615 219,615 219,615 219,615 219,615 Salvage/ (Capital Expenditures) Total 150,000 165,000 181,500 199,650 119,615 219,615 219,615 219,615 219,615 99,615 219,615 219,615 219,615 219,615 89,615 219,615 219,615 219,615 219,615 519,615 (100,000) (120,000) (130,000) 300,000 Rate NPV 0.12 1,406,855 (2) Fair value comparison: NPV of cash flows Total paid price for net assets Excess of fair value $ $1,406,855 1,300,000 106,855 (3) Entry to record acquisition: Cash Equivalents Inventory Accounts Receivable Land Building Equipment Patent Goodwill Current Liabilities Mortgage Payable Cash Dr = Cr Check Totals 31 80,000 150,000 180,000 200,000 329,850 220,000 103,550 361,610 120,000 205,010 1,300,000 1,625,010 1,625,010 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1–Cases Case 1-1, Concluded Part C Impairment test: Implied fair value of Frontier Book value, including goodwill $1,200,000 1,300,000 Book value exceeds implied fair value; goodwill is impaired Impairment adjustment: Implied fair value of Frontier Fair value of net identifiable assets (without goodwill) Implied remaining goodwill Recorded goodwill Required adjustment Goodwill Impairment Loss Goodwill $1,200,000 1,020,000 $ 180,000 (361,610) $ (181,610) 181,610 181,610 CASE 1-2 Estimation of 2005 EPS (in millions) Disney 2005 net income Pixar 2005 net income 2,533 153 Adjustments to Pixar income Book Fair Increase Life Film costs (Dec 31, 2005) Buildings and equipment (Dec 31, 2005) Intangibles Adjusted combined income 182 538 356 12 (30) 125 225 233 100 233 16 17 (6) (14) 2,636 Disney Shares Diluted Dec 31, 2005, average Issued in acquisition of Pixar Total shares 2,067 279 2,346 Adjustment Basic 2,043 279 2,322 Projected EPS $1.12 $1.14 Projected Disney only $1.23 $1.24 Based on this information, EPS would be diluted by the acquisition The 2005 pro forma numbers may benefit from improved operating performance by the combined firm and the one-time gain on the contract termination 32 ...To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (c) Originally, depreciation on... Capital in Excess of Par 10,000 Common Stock ($1 par) 10,000 (c) This agreement is also settled by issuing shares The price is not changed The paid-in capital in excess of par account is reduced... Paid-In Capital in Excess of Par 5,000 Common Stock ($1 par) 5,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ch 1—Exercises EXERCISES EXERCISE