Solution manual advanced accounting 10e by fischer taylor CH01

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CHAPTER 1
UNDERSTANDING THE ISSUES
1. (a) Horizontal combination—both are marine engine manufacturers
(b) Vertical combination—manufacturer
buys distribution outlets
(c) Conglomerate—unrelated businesses

6. (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 ....................................... $

2. 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.
3. 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

7. 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:

4. (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.

5. 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).

1


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(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.
8. 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

9. (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.

2

(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


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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 2.

3

15,000


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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) .............

4

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


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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 3 years at 20%)
Estimated liability under warranty ....................................................
Value of net identifiable assets acquired .........................................
Excess of total cost over fair value of net assets (goodwill) .............

5

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


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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) ...................

6

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)


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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................................................................................

7

$800,000
520,000
$280,000
$150,000
85,000
$

235,000
45,000


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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. × 2 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 ..........................................................................................

$

8

$

900,000

510,000
390,000

(120,000)
270,000


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Ch 1–Exercises

EXERCISE 1-8
(1) Liabilities ...................................................................................
40,000
Loss on Contingent Payment ...................................................
20,000
Cash ...................................................................................
60,000
2 × (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 .........................................................................................

9

$

$400,000
340,000
60,000
200,000
$140,000


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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 ÷ 5 years = $110,000
$100,000
125,000
100,000
300,000
250,000
$875,000
12%
$

105,000
5,000

(a) 5 × $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 5 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


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Ch. 1–Problems

PROBLEMS
PROBLEM 1-1

(1) Acquisition price

$500,000

Total consideration:
Cash .....................................................................................
Less fair value of net assets acquired:
Accounts receivable .............................................................

Inventory ..............................................................................
Other current assets .............................................................
Equipment ............................................................................
Trademark ............................................................................
In-process R&D ....................................................................
Current liabilities ...................................................................
Bonds payable .....................................................................
Value of net identifiable assets acquired ........................
Excess of total cost over fair value of net assets (goodwill) .....
Journal Entry:
Accounts Receivable ............................................................
Inventory ..............................................................................
Other Current Assets ...........................................................
Equipment ............................................................................
Trademark ............................................................................
R&D Expense .......................................................................
Goodwill ...............................................................................
Cash ...............................................................................
Current Liabilities............................................................
Bonds Payable ...............................................................
Dr. = Cr. Check Totals

$500,000
$

79,000
120,000
55,000
307,000
27,000

14,000
(145,000)
(100,000)
357,000
$143,000

79,000
120,000
55,000
307,000
27,000
14,000
143,000
500,000
145,000
100,000
745,000

11

745,000


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Ch. 1–Problems

Problem 1-1, Concluded
(2) Acquisition price

$300,000

Total consideration:
Cash .....................................................................................
Less fair value of net assets acquired:
Accounts receivable .............................................................
Inventory ..............................................................................
Other current assets .............................................................
Equipment ...........................................................................
Trademark ............................................................................
In-process R&D ....................................................................
Current liabilities ...................................................................
Bonds payable .....................................................................
Value of net identifiable assets acquired ........................
Excess of fair value of net assets over cost (gain) ...................
Journal Entry:
Accounts Receivable ............................................................
Inventory ..............................................................................
Other Current Assets ...........................................................
Equipment ............................................................................
Trademark ............................................................................
R&D Expense .......................................................................
Gain on Business Acquisition .........................................
Cash ...............................................................................
Current Liabilities............................................................
Bonds Payable ...............................................................
Dr. = Cr. Check Totals

$300,000
$

79,000
120,000
55,000
307,000
27,000
14,000
(145,000)
(100,000)
$

79,000
120,000
55,000
307,000
27,000
14,000
57,000
300,000
145,000
100,000
602,000

12

357,000
(57,000)

602,000

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Ch 1–Problems

PROBLEM 1-2

Total consideration for Vicker:
Common stock (30,000 shares × $40) .......................................
Less fair value of net assets acquired:
Accounts receivable ...................................................................
Inventory ....................................................................................
Land ...........................................................................................
Buildings.....................................................................................
Current liabilities.........................................................................
Bonds payable ...........................................................................
Value of net identifiable assets acquired ..............................
Excess of total cost over fair value of net assets (goodwill) .............
Bar entry to record the purchase of Vicker:
Accounts Receivable..................................................................
Inventory ....................................................................................
Land ...........................................................................................
Buildings.....................................................................................
Discount on Bonds Payable .......................................................
Goodwill .....................................................................................
Current Liabilities .................................................................
Bonds Payable .....................................................................
Common Stock (30,000 shares × $10 par) ..........................
Paid-In Capital in Excess of Par ...........................................
Dr. = Cr. Check Totals

$1,200,000
$

200,000
190,000
300,000
450,000
(160,000)
(90,000)
$

200,000
190,000
300,000
450,000
10,000
310,000
160,000
100,000
300,000
900,000
1,460,000

Acquisition Expense .........................................................................
Cash ...........................................................................................

13

890,000

310,000

1,460,000

5,000
5,000


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Ch. 1–Problems

Problem 1-2, Concluded
Total consideration for Kendal:
Common stock (15,000 shares × $40) .......................................
Less fair value of net assets acquired:
Accounts receivable ...................................................................
Inventory ....................................................................................
Land ...........................................................................................
Buildings.....................................................................................
Current liabilities.........................................................................
Bonds payable ...........................................................................
Value of net identifiable assets acquired ..............................
Excess of total cost over fair value of net assets (goodwill) .............
Bar entry to record the purchase of Kendal:
Accounts Receivable..................................................................
Inventory ....................................................................................
Land ...........................................................................................
Buildings.....................................................................................
Discount on Bonds Payable .......................................................

Goodwill .....................................................................................
Current Liabilities .................................................................
Bonds Payable .....................................................................
Common Stock (15,000 shares × $10 par) ..........................
Paid-In Capital in Excess of Par ...........................................
Dr. = Cr. Check Totals

$600,000
$

80,000
100,000
80,000
400,000
(55,000)
(95,000)
$

80,000
100,000
80,000
400,000
5,000
90,000
55,000
100,000
150,000
450,000
755,000

Acquisition Expense .........................................................................
Cash ...........................................................................................

4,000

Paid-In Capital in Excess of Par ......................................................
Cash ...........................................................................................
To record issue and acquisition costs.

15,000

14

510,000
90,000

755,000

4,000

15,000


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Ch 1–Problems

PROBLEM 1-3

(1) Total consideration for Yount:

Cash .....................................................................................
Less fair value of net assets acquired:
Cash equivalents ..................................................................
Accounts receivable .............................................................
Inventory ..............................................................................
Depreciable fixed assets ......................................................
Current liabilities ...................................................................
Long-term liabilities ..............................................................
Value of net identifiable assets acquired ........................
Excess of total cost over fair value of net assets (goodwill) .....

$730,000
$

Acquisition entry:
Cash Equivalents .................................................................
Accounts Receivable ............................................................
Inventory ..............................................................................
Depreciable Fixed Assets ....................................................
Goodwill ...............................................................................
Current Liabilities............................................................
Long-Term Liabilities ......................................................
Cash ...............................................................................

100,000
120,000
70,000
400,000
(30,000)
(165,000)

495,000
$235,000

100,000
120,000
70,000
400,000
235,000
30,000
165,000
730,000

Dr. = Cr. Check Totals

925,000

Acquisition Expense .................................................................
Cash .....................................................................................

20,000

925,000

20,000

(2) Pro Forma Income:
Sales .....................................................................................................
Less:
Cost of goods sold ($120,000 + $20,000 additional for inventory
valuation) ....................................................................................

Other expenses ..............................................................................
Depreciation (1/20 of $400,000 market value) ................................
Net income............................................................................................

15

Combined Income
$
200,000

$

(140,000)
(25,000)
(20,000)
15,000


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Ch. 1–Problems

PROBLEM 1-4

(1) $500,000 consideration
Total consideration for Williams:
Common stock (20,000 shares × $25) .................................
Less fair value of net assets acquired:
Accounts receivable .............................................................
Inventory ..............................................................................

Land .....................................................................................
Building ................................................................................
Accounts payable .................................................................
Value of net identifiable assets acquired ........................
Excess of total cost over fair value of net assets (goodwill) .....

$500,000
$

50,000
250,000
40,000
120,000
(40,000)
$

Kiln Corporation journal entries:
Accounts Receivable ............................................................
Inventory ..............................................................................
Land .....................................................................................
Building ................................................................................
Goodwill ...............................................................................
Accounts Payable...........................................................
Common Stock ...............................................................
Paid-In Capital in Excess of Par .....................................

420,000
80,000

50,000

250,000
40,000
120,000
80,000
40,000
200,000
300,000

Dr. = Cr. Check Totals

540,000

540,000

(2) $385,000 consideration
Total consideration for Williams:
Cash .....................................................................................
Less fair value of net assets acquired:
Accounts receivable .............................................................
Inventory ..............................................................................
Land .....................................................................................
Building ................................................................................
Accounts payable .................................................................
Value of net identifiable assets acquired ........................
Excess of fair value of net assets over cost (gain) ...................
Kiln Corporation journal entries:
Accounts Receivable ............................................................
Inventory ..............................................................................
Land .....................................................................................
Building ................................................................................

Gain on Acquisition ........................................................
Accounts Payable...........................................................
Cash ...............................................................................
Dr. = Cr. Check Totals

$385,000
$

50,000
250,000
40,000
120,000
(40,000)
$

50,000
250,000
40,000
120,000
35,000
40,000
385,000
460,000

16

420,000
(35,000)

460,000

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Ch 1–Problems

PROBLEM 1-5

Total consideration for Jake:
Common stock (16,000 shares × $265) .....................................
Less fair value of net assets acquired:
Investments ................................................................................
Accounts receivable ...................................................................
Inventory ....................................................................................
Prepaid insurance ......................................................................
Land ...........................................................................................
Machinery and equipment ..........................................................
Current liabilities.........................................................................
Value of net identifiable assets acquired ..............................
Excess of total cost over fair value of net assets (goodwill) .............
Journal Entry:
Investments ................................................................................
Accounts Receivable..................................................................
Inventory ....................................................................................
Prepaid Insurance ......................................................................
Land ..........................................................................................
Machinery and Equipment ........................................................
Goodwill .....................................................................................
Current Liabilities .................................................................
Common Stock (16,000 × $10) ............................................

Paid-In Capital in Excess of Par [(16,000 × $265) – $160,000]
Dr. = Cr. Check Totals

$4,240,000
$

400,500
912,500
1,200,000
18,000
70,000
1,841,875
(1,475,000)
2,967,875
$1,272,125

400,500
912,500
1,200,000
18,000
70,000
1,841,875
1,272,125
1,475,000
160,000
4,080,000
5,715,000

Acquisition Expense .........................................................................
Cash ...........................................................................................

17

5,715,000

12,000
12,000


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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


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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


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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


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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


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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
6 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


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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) × 2 = $11,750 × 2 = $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


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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


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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