Solution manual for advanced financial accounting 6th edition by baker download

Chapter Solution Manual for Advanced Financial Accounting 6th Edition by Baker ANSWERS TO QUESTIONS Q1-1 Complex organization structures often result when companies business in a complex business environment New subsidiaries or other entities may be formed for purposes such as extending operations into foreign countries, seeking to protect existing assets from risks associated with entry into new product lines, separating activities that fall under regulatory controls, and reducing taxes by separating certain types of operations Q1-2 The split-off and spin-off result in the same reduction of reported assets and liabilities Only the stockholders’ equity accounts of the company are different The number of shares outstanding remains unchanged in the case of a spin-off and retained earnings or paid-in capital is reduced Shares of the parent are exchanged for shares of the subsidiary in a split-off, thereby reducing the outstanding shares of the parent company Q1-3 The management of Enron appears to have used special purpose entities to avoid reporting debt on its balance sheet and to create fictional transactions that resulted in reported income It also transferred bad loans and investments to special purpose entities to avoid recognizing losses in its income statement Q1-4 (a) A statutory merger occurs when one company acquires another company and the assets and liabilities of the acquired company are transferred to the acquiring company; the acquired company is liquidated, and only the acquiring company remains (b) A statutory consolidation occurs when a new company is formed to acquire the assets and liabilities of two combining companies; the combining companies dissolve, and the new company is the only surviving entity (c) A stock acquisition occurs when one company acquires a majority of the common stock of another company and the acquired company is not liquidated; -1- both companies remain as separate but related corporations Q1-5 Assets and liabilities transferred to a new wholly-owned subsidiary normally are transferred at book value In the event the value of an asset transferred to a newly created entity has been impaired prior to the transfer and its fair value is less than the carrying value on the transferring company’s books, the transferring company should recognize an impairment loss and the asset should then be transferred to the entity at the lower value Q1-6 The introduction of the concept of beneficial interest expands those situations in which consolidation is required Existing accounting standards have focused on the presence or absence of equity ownership Consolidation and equity method reporting have been required when a company holds the required level of common stock of another entity The beneficial interest approach says that even when a company does not hold stock of another company, consolidation should occur whenever it has a direct or indirect ability to make decisions significantly affecting the results of activities of an entity or will absorb a majority of an entity=s expected losses or receive a majority of the entity=s expected residual returns -2- Q1-7 Under pooling of interests accounting, the book values of the acquired company were carried forward rather than being revalued to fair values that often were higher than book values, thereby avoiding increased depreciation charges on revalued fixed assets During most of the time pooling accounting was acceptable, goodwill was required to be amortized, and, because no goodwill was recognized under pooling, those amortization charges were avoided The carrying forward of retained earnings of all combining companies may, in some cases, have given management increased flexibility with respect to dividends Operating results of the combining companies were combined for the full year in which the combination occurred, not just from the point of combination, resulting in more favorable reported results in the year of the business combination The pooling method hides the value of the consideration given, shielding management from stockholder criticism in those cases where management paid an excessive amount for the company acquired Q1-8 Purchase accounting normally results in increased dollar amounts reported in the balance sheet Recognition of the fair values of identifiable assets and liabilities acquired typically results in larger dollar amounts being reported In addition, goodwill is recorded as an asset under purchase accounting, but not recognized in a pooling Because retained earnings are not carried forward in a purchase, retained earnings typically is lower; however, recognition of the fair value of shares issued typically results in larger paid-in capital account balances Increased depreciation charges and the amortization or impairment of goodwill generally result in lower reported net income when purchase treatment is used Q1-9 Goodwill arises when purchase accounting is used and the fair value of the compensation given to acquire another company is greater than the fair value of its identifiable net assets Goodwill is recorded on the books of the acquiring company when the net assets of the acquired company are transferred to the acquiring company and recorded on the acquiring company's books When the acquired company is operated as a separate entity, the amount paid by the purchaser is included in the investment account and goodwill, as such, is not recorded on the books of either company In this case, goodwill is only reported when the investment account of the parent is eliminated in the consolidation process Q1-10 The purchase of a company is viewed in the same way as any other purchase of assets The acquired company is owned by the acquiring company only for the portion of the year subsequent to the combination Therefore, earnings are accrued only from the date of purchase forward Q1-11 None of the retained earnings of the subsidiary should be carried forward under purchase treatment Thus, consolidated retained earnings is limited to the balance reported by the acquiring company Q1-12 Some companies have attempted to establish the corporate name as a symbol of quality or product availability An acquiring company may be fearful that customers will be lost if the company is liquidated Debt covenants are likely to require repayment of virtually all existing debt if the acquired company is liquidated The cost of issuing new debt may be prohibitive A parent-subsidiary relationship may be the only feasible means of proceeding if it is impossible to acquire 100 percent ownership of an acquired company When the acquiring company does not plan to retain all operations of the acquired company, it may be easier to dispose of the portions not wanted by leaving them in the existing -3- corporate shell and later disposing of the ownership of the company -4- Q1-13 Negative goodwill is said to exist when a purchaser pays less than the fair value of the identifiable net assets of another company in acquiring its ownership This difference normally is treated as a pro rata reduction of all of the acquired assets other than cash and cash equivalents, trade receivables, inventory, financial instruments that are required by U.S generally accepted accounting principles (GAAP) to be carried on the balance sheet at fair value, assets to be disposed of by sale, and deferred tax assets Q1-14 If the fair value of a reporting unit acquired in a business combination exceeds its carrying amount, the goodwill of that reporting unit is considered unimpaired On the other hand, if the carrying amount of the reporting unit exceeds its fair value, impairment of goodwill must be recognized if the carrying amount of the goodwill assigned to the reporting unit is greater than the implied value of the carrying unit=s goodwill The implied value of the reporting unit=s goodwill is determined as the excess of the fair value of the reporting unit over the fair value of its net assets excluding goodwill Q1-15 Additional paid-in capital reported following a business combination recorded as a purchase is the amount previously reported on the acquiring company's books plus the excess of the fair value over the par or stated value of any shares issued by the acquiring company in completing the acquisition Q1-16 A purchase is treated prospectively None of the financial statement data of the acquired company is included along with the financial statement data of the acquiring company for periods prior to the business combination Q1-17 When purchase treatment is used, all costs incurred in purchasing the ownership of another company are capitalized These normally include items such as finder's fees, the costs of title transfer, and legal fees associated with the purchase Q1-18 When the acquiring company issues shares of stock to complete a business combination recorded as a purchase, the excess of the fair value of the stock issued over its par value is recorded as additional paid-in capital All costs incurred by the acquiring company in issuing the securities should be treated as a reduction in the additional paid-in capital Items such as audit fees associated with the registration of securities, listing fees, and brokers' commissions should be treated as reductions of additional paid-in capital when stock is issued An adjustment to bond premium or bond discount is needed when bonds are used to complete the purchase -5- SOLUTIONS TO CASES C1-1 Reporting Alternatives and International Harmonization a In the past, when goodwill was capitalized, U.S companies were required to systematically amortize the amount recorded, thereby reducing earnings, while companies in other countries were not required to so Recent changes in accounting for goodwill have substantially eliminated this objection b U S companies must be concerned about accounting standards in other countries and about international standards (i.e., those issued by the International Accounting Standards Committee) Companies operate in a global economy today; not only they buy and sell products and services in other countries, but they may raise capital and have operations located in other countries Such companies may have to meet foreign reporting requirements, and these requirements may differ from U S reporting standards Thus, many U S companies, and not just the largest, may find foreign and international reporting standards relevant if they are going to operate globally C1-2 Assignment of Acquisition Costs MEMO To: Vice-President of Finance Troy Company From: Re: , CPA Recording Acquisition Costs of Business Combination Troy Company incurred a variety of costs in acquiring the ownership of Kline Company and transferring the assets and liabilities of Kline to Troy Company I was asked to review the relevant accounting literature and provide my recommendations on the appropriate treatment of the costs incurred in the acquisition of Kline Company The accounting standards applicable to the 2003 acquisition state: The cost of an entity acquired in a business combination includes the direct costs of the business combination Costs of registering and issuing equity securities shall be recognized as a reduction of the otherwise determinable fair value of the securities [FASB 141, Par 24] A total of $720,000 was paid by Troy in completing its acquisition of Kline The $200,000 finders = fee and $90,000 of legal fees for transferring Kline=s assets and liabilities to Troy should be included in the purchase price of Kline The $60,000 payment for stock registration and audit fees should be recorded as a reduction of paid-in capital recorded when the Troy Company shares were issued to acquire the shares of Kline The only cost potentially at issue is the $370,000 of legal fees resulting from the litigation by the shareholders of Kline If this cost -6- is considered to be a direct cost, it should be included in the costs of acquiring Kine If, on the other hand, it is considered an indirect or general expense, it should be charged to -7- C1-2 (continued) expense in 2002 The accounting standards state: Indirect or general expenses related to business combinations shall be expensed as incurred [FASB 141, Par 24] While one might argue that the $370,000 was an indirect cost, it resulted directly from the exchange of shares used to complete the business combination and should be included in the amount assigned to the cost of acquiring ownership of Kline Of the total costs incurred, $ 660,000 should be assigned to the purchase price of Kline and $60,000 recorded as a reduction of paid-in-capital You also requested a summary of proposed changes to the requirements established in FASB 141 A report on the current status of the FASB=s proposals can be found under ABusiness Combinations: Purchase Method Procedures@ at the FASB website (www.fasb.org/projectupdates) The current proposal states: Acquisition-related costs paid to third parties (for example: finder=s, advisory, legal, accounting, and other professional fees that are attributable to negotiating or completing the business combination) are not part of the exchange transaction and should be expensed as incurred [FASB Project Update] Under the proposed standard, if Troy were to incur a total of $720,000 in costs when it acquires Lad Company, the full amount would be recorded as an expense Primary citation FASB 141, Par 24 FASB Project Update -8- C1-3 Goodwill and the Effects of Purchase Treatment a The nature of goodwill is not completely clear and is the subject of some disagreement In general, goodwill is viewed as the collection of all those factors that allow a company to earn an excess return; that is, all those hard-to-identify intangible qualities that permit a firm to earn a return in excess of a normal return Goodwill is identified with the firm as a whole and generally is considered as being not separable from the firm Goodwill presumably arises from bringing together a particular set of resources that produces higher earnings than could the individual resources or other similar collections of resources Factors contributing to excess earnings often are considered to include superior management, outstanding reputation, prime location, special economies, and many other factors Some would argue that, if these factors can be identified, they each should be treated separately rather than being lumped together in a single "catch-all" account called goodwill The primary characteristics of an asset are that it represents (1) probable future benefits (2) controlled by a particular entity (3) resulting from past transactions or events If one company purchases another company and is willing to pay more for that company than the fair value of its net identifiable assets, this implies the existence of some set of factors, generally called goodwill, that is expected to contribute future benefits to the combined company in the form of higher earnings Thus, the first characteristic of an asset would seem to be present in goodwill If these factors arose as a result of past transactions or events, the third characteristic is present Whether a particular entity can control the factors leading to excess earnings is a matter of some debate, especially when it may be difficult to identify the factors Nevertheless, at least some portion of those factors generally is viewed as being under at least partial control of the particular entity Current accounting practice assumes all three elements are present and treats goodwill as an asset Because of a lack of objectivity leading to measurement problems, goodwill may not be recognized in all situations where it is thought to exist In particular, "selfdeveloped" goodwill is not recognized Goodwill is recorded only when one or more identifiable assets are acquired in a purchase-type transaction, usually in a business combination As with other assets, goodwill is recorded at its historical cost to the acquiring company at the time it is purchased Its historical cost to the acquiring company in a business combination is computed as the excess of the total purchase price paid (for the stock or net assets of the acquired company) over the fair value of the net identifiable assets acquired b The FASB recently changed accounting for goodwill Under the new standard, goodwill will not be amortized in any circumstance The carrying amount of goodwill is reduced only if it is found to be impaired or was associated with assets to be sold or otherwise disposed of -9- C1-4 Business Combinations It is very difficult to develop a single explanation for any series of events Merger activity in the United States is impacted by events both within our economy and those around the world As a result, there are many potential answers to the questions posed in this case a The most commonly discussed factors associated with the merger activity of the nineties relate to the increased profitability of businesses In the past, increases in profitability typically have been associated with increases in sales The increased profitability of companies in the past decade, however, more commonly has been associated with decreased costs Even though sales remained relatively flat, profits increased Nearly all business entities appear to have gone through one or more downsizing events during the past decade Fewer employees now are delivering the same amount of product to customers Lower inventory levels and reduced investment in production facilities now are needed due to changes in production processes and delivery schedules Thus, less investment in facilities and fewer employees have resulted in greater profits Companies generally have been reluctant to distribute the increased profits to shareholders through dividends The result has been a number of companies with substantially increased cash reserves This, in turn, has led management to look about for other investment alternatives, and cash buyouts have become more frequent in this environment In addition to high levels of cash on hand providing an incentive for business combinations, easy financing through debt and equity also provided encouragement for acquisitions Throughout the nineties, interest rates were very low and borrowing was generally easy With the enormous stock-price gains of the mid -nineties, companies found that they had a very valuable resource in shares of their stock Thus, stock acquisitions again came into favor b Establishing incentives for corporate mergers is a controversial issue Many people in our society view mergers as not being in the best interests of society because they are seen as lessening competition and often result in many people losing their jobs On the other hand, many mergers result in companies that are more efficient and can compete better in a global economy; this in turn may result in more jobs and lower prices Even if corporate mergers are viewed favorably, however, the question arises as to whether the government, and ultimately the taxpayers, should be subsidizing those mergers through tax incentives Many would argue that the desirability of individual corporate mergers, along with other types of investment opportunities, should be determined on the basis of the merits of the individual situations rather than through tax incentives Perhaps the most obvious incentive is to lower capital gains tax rates Businesses may be more likely to invest in other companies if they can sell their ownership interests when it is convenient and pay lesser tax rates Another alternative would include exempting certain types of intercorporate income Favorable tax status might be given to investment in foreign companies through changes in tax treaties As an alternative, barriers might be raised to discourage foreign investment in United States thereby increasing the opportunities for domestic firms to acquire ownership of other companies - 10 - P1-28 (continued) b 900,000 shares issued: Deferred Merger Costs Deferred Stock Issue Costs Cash Cash and Equivalents Accounts Receivable Inventory Land Buildings Equipment Goodwill (1) Accounts Payable Short-Term Notes Payable Bonds Payable Common Stock $2 Par Additional Paid-In Capital (2) Deferred Merger Costs Deferred Stock Issue Costs (1) Goodwill: Total purchase price: Value of stock issued ($4 x 900,000) Merger costs Total purchase price 38,000 22,000 60,000 41,000 73,000 144,000 200,000 1,500,000 300,000 1,965,000 35,000 50,000 500,000 1,800,000 1,778,000 38,000 22,000 $3,600,000 38,000 $3,638,000 Fair value of net assets acquired ($41,000 + $73,000 + $144,000 + $200,000 + $1,500,000 + $300,000 - $35,000 - $50,000 - $500,000) (1,673,000) Goodwill $1,965,000 (2) Additional paid-in capital: $1,778,000 = [($4 - $2) x 900,000] - $22,000 - 38 - P1-29 Business Combination with Goodwill a Journal entry to record acquisition of Zink Company net assets: Cash 20,000 Accounts Receivable 35,000 Inventory 50,000 Patents 60,000 Buildings and Equipment 150,000 Goodwill 38,000 Accounts Payable 55,000 Notes Payable 120,000 Cash 178,000 b Balance sheet immediately following acquisition: Anchor Corporation and Zink Company Combined Balance Sheet February 1, 20X3 Cash $ 82,000 Accounts Payable Accounts Receivable 175,000 Notes Payable Inventory 220,000 Common Stock Patents 140,000 Additional Paid-In Buildings and Equipment 530,000 Capital Less: Accumulated Retained Earnings (190,000) Depreciation Goodwill 38,000 $995,000 $140,000 270,000 200,000 160,000 225,000 $995,000 c Journal entry to record acquisition of Zink Company stock: Investment in Zink Company Common 178,000 Stock 178,000 Cash - 39 - P1-30 Negative Goodwill Journal entries to record acquisition of Lark Corporation net assets: Deferred Merger Costs 5,000 Cash Cash 50,000 Inventory 150,000 Buildings and Equipment (net) 240,000 Patent 160,000 Accounts Payable Cash Deferred Merger Costs 5,000 30,000 565,000 5,000 Computation of negative goodwill Purchase price Fair value of net assets acquired ($700,000 - $30,000) $570,000 Negative goodwill $100,000 (670,000) Assignment of negative goodwill to noncurrent assets Item Buildings and Equipment Patent Fair Value $300,000 200,000 $500,000 - 40 - Reduction for Negative Goodwill $100,000 x (300/500) $100,000 x (200/500) Assigned Valuation $240,000 160,000 $400,000 P1-31 Computation of Account Balances a Liabilities reported by the Aspro Division at year-end: Fair value of reporting unit at year-end Purchase price of reporting unit ($7.60 x 100,000) Fair value of net assets at acquisition ($810,000 - $190,000) Goodwill at acquisition $930,000 $760,000 (620,000) $140,000 Impairment in current year (30,000) Goodwill at year-end (110,000) Fair value of net assets at year-end $820,000 Fair value of assets at year-end Fair value of net assets at year-end $950,000 (820,000) Fair value of liabilities at year-end $130,000 b Required fair value of reporting unit: Fair value of assets at year-end Fair value of liabilities at year-end (given) Fair value of net assets at year-end $ 950,000 (70,000) $ 880,000 Original goodwill balance 140,000 Required fair value of reporting unit to avoid recognition of impairment of goodwill - 41 - $1,020,000 P1-32 Goodwill Assigned to Multiple Reporting Units a Goodwill to be reported by Rover Company: Reporting Unit A Carrying value of goodwill C B $70,000 $80,000 Implied goodwill at year-end 90,000 Goodwill to be reported at year-end 70,000 Total goodwill to be reported at year-end: Reporting unit A Reporting unit B Reporting unit C 50,000 50,000 $40,00 75,000 40,000 $ 70,000 50,000 40,000 Total goodwill to be reported $160,000 Computation of implied goodwill Reporting unit A Fair value of reporting unit Fair value of identifiable assets Fair value of accounts payable $400,000 $350,000 (40,000) Fair value of net assets (310,000) Implied goodwill at year-end $ 90,000 Reporting unit B Fair value of reporting unit Fair value of identifiable assets Fair value of accounts payable $440,000 $450,000 (60,000) Fair value of net assets (390,000) Implied goodwill at year-end $ 50,000 Reporting unit C Fair value of reporting unit Fair value of identifiable assets Fair value of accounts payable $265,000 $200,000 (10,000) Fair value of net assets (190,000) Implied goodwill at year-end $ 75,000 b Goodwill impairment of $30,000 ($80,000 - $50,000) must be reported in the current period for reporting unit B Solutions Manual- Baker/Lembke/King, Advanced Financial Accounting, 6/e - 42 - P1-33 Journal Entries Journal entries to record acquisition of Light Steel net assets under purchase treatment: (1) Deferred Merger Costs 19,000 Cash 19,000 Record finder's fee and transfer costs (2) Deferred Stock Issue Costs 9,000 Cash 9,000 Record audit fees and stock registration fees (3) Cash 60,000 Accounts Receivable 100,000 Inventory 115,000 Land 70,000 Buildings and Equipment 350,000 Bond Discount 20,000 Goodwill 114,000 Accounts Payable 10,000 Bonds Payable 200,000 Common Stock 120,000 Additional Paid-In Capital 471,000 Deferred Merger Costs 19,000 Deferred Stock Issue Costs 9,000 Record purchase-type merger with Light Steel Company Computation of goodwill Value of shares issued ($50 x 12,000) Finder's fee Legal fees for asset transfer $600,000 10,000 9,000 $619,000 Fair value of net assets acquired (505,000) Goodwill $114,000 - 43 - P1-34 Purchase at More than Book Value a Journal entry to record acquisition of Stafford Industries net assets: Cash 30,000 Accounts Receivable 60,000 Inventory 160,000 Land 30,000 Buildings and Equipment 350,000 Bond Discount 5,000 Goodwill 125,000 Accounts Payable 10,000 Bonds Payable 150,000 Common Stock 80,000 Additional Paid-In Capital 520,000 b Balance sheet immediately following acquisition: Cash Ramrod Manufacturing and Stafford Industries Combined Balance Sheet January 1, 20X2 $ 100,000 Accounts Payable Accounts Receivable Inventory 160,000 360,000 Land Buildings and Equipment Less: Accumulated Depreciation Goodwill 80,000 Bonds Payable Less: Discount $450,000 (5,000) $ 60,000 445,000 Common Stock 950,000 Additional Paid-In Capital Retained (250,000) Earnings 125,000 $1,525,000 280,000 560,000 180,000 $1,525,000 P1-35 Business Combination Journal entry to record acquisition of Toot-Toot Tuba net assets under purchase treatment: Cash 300 Accounts Receivable 17,000 Inventory 35,000 Plant and Equipment 500,000 Other Assets 25,800 Goodwill 86,500 Allowance for Uncollectibles 1,400 Accounts Payable 8,200 Notes Payable 10,000 Mortgage Payable 50,000 Bonds Payable 100,000 Capital Stock ($10 par) 90,000 - 44 - Premium on Capital Stock - 45 - 405,000 P1-36 Combined Balance Sheet a Purchase balance sheet: Bilge Pumpworks and Seaworthy Rope Company Combined Balance Sheet January 1, 20X3 Cash and Receivables Inventory Land Plant and Equipment Less: Accumulated Depreciation Goodwill $110,000 Current Liabilities 142,000 Capital Stock 115,000 Capital in Excess 540,000 of Par Value Retained Earnings (150,000) 13,000 $770,000 b (1) Stockholders' equity with 1,100 shares issued Capital Stock [$200,000 + ($20 x 1,100 shares)] Capital in Excess of Par Value [$20,000 + ($300 - $20) x 1,100 shares] Retained Earnings $ 100,000 214,000 216,000 240,000 $ 770,000 $ 222,000 328,000 240,000 $ 790,000 (2) Stockholders' equity with 1,800 shares issued Capital Stock [$200,000 + ($20 x 1,800 shares)] Capital in Excess of Par Value [$20,000 + ($300 - $20) x 1,800 shares] Retained Earnings $ 236,000 524,000 240,000 $1,000,000 (3) Stockholders' equity with 3,000 shares issued Capital Stock [$200,000 + ($20 x 3,000 shares)] Capital in Excess of Par Value [$20,000 + ($300 - $20) x 3,000 shares] Retained Earnings $ 260,000 860,000 240,000 $1,360,000 - 46 - P1-37 Incomplete Data Problem a 5,200 = ($126,000 - $100,000)/$5 b $208,000 = ($126,000 + $247,000) - ($100,000 + $65,000) c $46,000 = $96,000 - $50,000 d $130,000 = ($50,000 + $88,000 + $96,000 + $430,000 - $46,000 $220,000 - $6,000) - ($40,000 + $60,000 + $50,000 + $300,000 $32,000 - $150,000 - $6,000) e $78,000 = $208,000 - $130,000 f $97,000 (as reported by End Corporation) g $13,000 = ($430,000 - $300,000)/10 years P1-38 Incomplete Data Following Purchase a 14,000 = $70,000/$5 b $8.00 = ($70,000 + $42,000)/14,000 c 7,000 = ($117,000 - $96,000)/$3 d $364,000 = ($117,000 + $577,000) - ($96,000 + $234,000) e $24,000 = $65,000 + $15,000 - $56,000 f $110,000 = $320,000 - $210,000 g $306,000 = ($15,000 + $30,000 + $110,000 + $293,000) ($22,000 + $120,000) h $82,000 = $364,000 + $24,000 - $306,000 - 47 - P1-39 Comprehensive Business Combination Problem a Journal entries on the books of Integrated Industries to record the combination: Deferred Merger Costs 135,000 135,000 Cash Deferred Stock Issue Costs 42,000 42,000 Cash Cash 28,000 Accounts Receivable 258,000 Inventory 395,000 Long-Term Investments 175,000 Land 100,000 Rolling Stock 63,000 Plant and Equipment 2,500,000 Patents 500,000 Special Licenses 100,000 Discount on Equipment Trust Notes 5,000 Discount on Debentures 50,000 Goodwill 244,700 6,500 Allowance for Bad Debts Current Payables 137,200 Mortgages Payable 500,000 Premium on Mortgages Payable 20,000 Equipment Trust Notes 100,000 Debentures Payable 1,000,000 Common Stock 180,000 Additional Paid-In Capital — Common 2,298,000 Deferred Merger Costs 135,000 Deferred Stock Issue Costs 42,000 Computation of goodwill Value of stock issued ($14 x 180,000) Direct merger costs Total purchase price $2,520,000 135,000 $2,655,000 $4,112,500 (1,702,200) Fair value of assets acquired Fair value of liabilities assumed Fair value of net identifiable assets (2,410,300) Goodwill $ - 48 - 244,700 P1-39 (continued) b Journal entries on the books of HCC to record the combination: Investment in Integrated Industries Stock 2,520,000 Allowance for Bad Debts 6,500 Accumulated Depreciation 614,000 Current Payables 137,200 Mortgages Payable 500,000 Equipment Trust Notes 100,000 Debentures Payable 1,000,000 Discount on Bonds Payable 40,000 Cash 28,000 Accounts Receivable 258,000 Inventory 381,000 Long-Term Investments 150,000 Land 55,000 Rolling Stock 130,000 Plant and Equipment 2,425,000 Patents 125,000 Special Licenses 95,800 Gain on Sale of Assets and Liabilities 1,189,900 Record sale of assets and liabilities Common Stock 7,500 Additional Paid-In Capital — Common Stock 4,500 Treasury Stock 12,000 Record retirement of Treasury Stock:* $7,500 = $5 x 1,500 shares $4,500 = $12,000 - $7,500 Common Stock 592,500 Additional Paid-In Capital — Common 495,500 Additional Paid-In Capital — Retirement 22,000 of Preferred Retained Earnings 1,410,000 Investment in Integrated 2,520,000 Industries Stock Record retirement of HCC stock and distribution of Integrated Industries stock: $592,500 = $600,000 - $7,500 $495,500 = $500,000 - $4,500 1,410,000 = $220,100 + $1,189,900 *Alternative approaches exist - 49 - P1-40 Incomplete Data for Purchase a Inventory reported by Spice at date of combination was $70,000 (325,000 - $20,000 - $55,000 - $140,000 - $40,000) b Fair value of total assets reported by Spice: Fair value of cash Fair value of accounts receivable Fair value of inventory Buildings and equipment reported following purchase Buildings and equipment reported by Roto $ 20,000 55,000 110,000 $570,000 (350,000) 220,000 Fair value of Spice's total assets $405,000 c Market value of Spice's bond: Book value reported by Spice Bond premium reported following purchase $100,000 5,000 Market value of bond $105,000 d Shares issued by Roto Corporation: Par value of stock following acquisition Par value of stock before acquisition $190,000 (120,000) Increase in par value of shares outstanding $ Divide by par value per share ÷ Number of shares issued 70,000 $5 14,000 e Market price per share of stock issued by Roto Corporation: Par value of stock following acquisition $190,000 Additional paid-in capital following acquisition 262,000 Par value of stock before acquisition Additional paid-in capital before acquisition $120,000 10,000 $452,000 (130,000) Market value of shares issued in acquisition $322,000 Divide by number of shares issued ÷ 14,000 Market price per share $ 23.00 - 50 - P1-40 (continued) f Goodwill reported following the business combination: Market value of shares issued by Roto Fair value of Spice's assets $405,000 Fair value of Spice's liabilities: $ 30,000 Accounts payable Bond payable 105,000 Fair value of liabilities Fair value of Spice's net asset Goodwill recorded in business $322,000 (135,000) (270,000) $ 52,000 30,000 combination Goodwill previously on the books of Roto Goodwill reported $ 82,000 g Retained earnings reported by Spice at date of combination was $90,000 ($325,000 - $30,000 - $100,000 - $50,000 - $55,000) h Roto's retained earnings of $120,000 will be reported i Deferred Merger Costs Deferred Stock Issue Costs Cash Goodwill previously computed Deferred merger costs added to investment account Total goodwill reported 17,000 9,800 26,800 $ 82,000 17,000 $ 99,000 Additional paid-in capital reported following combination Deferred stock issue costs $262,000 (9,800) Total additional paid-in capital reported $252,200 - 51 - (Page Intentionally Left Blank) - 52 - ... Subsidiary a Journal entry recorded by Lester Company for transfer of assets to Mumby Corporation: Investment in Mumby Corporation Common 498,000 Stock 7,000 Allowance for Uncollectible Accounts Receivable... inventory, financial instruments that are required by U.S generally accepted accounting principles (GAAP) to be carried on the balance sheet at fair value, assets to be disposed of by sale, and... investment in foreign companies through changes in tax treaties As an alternative, barriers might be raised to discourage foreign investment in United States thereby increasing the opportunities for domestic