Advanced Accounting 5th ed ch2 solutions

CHAPTER 2

Part A Receivables Inventory Plant and Equipment 228,000

396,000 540,000 Land Goodwill ($2,154,000 - $1,824,000) Liabilities Cash

Part B Receivables Inventory Plant and Equipment Land Liabilities Cash Gain on Acquisition of Saville - Ordinary ($1,230,000 -

$990,000)

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660,000 330,000 228,000 396,000 540,000 660,000

594,000 1,560,000

594,000 990,000 240,000

Cash

Receivables Inventories

Plant and Equipment (net) ($3,840,000 + $720,000) Goodwill Total Assets

Liabilities

Common Stock, $16 par ($3,440,000 + (.50 $800,000)) Other Contributed Capital ($400,000 + $800,000) Retained Earnings Total Equities

$680,000 720,000 2,240,000 4,560,000 1,520,000 3,840,000 1,200,000

Cash 200,000 Receivables 240,000 Inventory 240,000 Plant and Equipment 720,000 Goodwill * 120,000 Liabilities 320,000

400,000 Common Stock (25,000 $16)

800,000 Other Contributed Capital ($48 - $16) 25,000

* ($48 25,000) – [($1,480,000 – ($800,000 – $720,000) – $320,000]

= $1,200,000 – [$1,480,000 – $80,000 – $320,000] = $1,200,000 – $1,080,000 = $120,000

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Accounts Receivable 231,000 Inventory 330,000 Land 550,000 Buildings and Equipment 1,144,000 Goodwill 848,000 Allowance for Uncollectible Accounts ($231,000 - $198,000) 33,000 Current Liabilities 275,000 Bonds Payable 450,000 Premium on Bonds Payable ($495,000 - $450,000) 45,000

1,500,000 Preferred Stock (15,000 $100)

300,000 Common Stock (30,000 $10)

450,000 Other Contributed Capital ($25 - $10) 30,000

Cash 50,000

Cost of acquisition ($1,500,000 + $750,000 + $50,000) = $2,300,000 Fair value of net assets (198,000 + 330,000 + 550,000 + 1,144,000 – 275,000 – 495,000) = Goodwill =

Cash

Receivables Inventory Land

Plant and Equipment Goodwill* Accounts Payable Bonds Payable Premium on Bonds Payable** Cash

** Present value of maturity value, 12 periods @ 4%: 0.6246 $480,000 = Present value of interest annuity, 12 periods @ 4%: 9.38507 $24,000 = Total present value Par value

Premium on bonds payable

96,000 55,200 126,000 198,000 466,800 137,450

44,400 480,000 45,050 510,000

$299,808 525,050 $510,000 136,800

*Cash paid

Less: Book value of net assets acquired ($897,600 – $44,400 – $480,000) Excess of cash paid over book value Increase in inventory to fair value (15,600) Increase in land to fair value (28,800) Increase in bond to fair value Total increase in net assets to fair value Goodwill

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Current Assets 960,000

Plant and Equipment 1,440,000 Goodwill 336,000 Liabilities 216,000 Cash 2,160,000 Liability for Contingent Consideration 360,000

The amount of the contingency is $500,000 (10,000 shares at $50 per share)

500,000 Part A Goodwill

Paid-in-Capital for Contingent Consideration - Issuable 500,000

500,000 Part B Paid-in-Capital for Contingent Consideration - Issuable

Common Stock ($10 par) 100,000 Paid-In-Capital in Excess of Par 400,000

1. (c) Cost (8,000 shares @ $30) $240,000 Fair value of net assets acquired Excess of cost over fair value (goodwill)

2. (c) Cost (8,000 shares @ $30) $240,000 Fair value of net assets acquired ($90,000 + $242,000 – $56,000) Excess of fair value over cost (gain)

Current Assets 362,000 Long-term Assets ($1,890,000 + $20,000) + ($98,000 + $5,000) 2,013,000 Goodwill * 395,000 Liabilities 119,000 Long-term Debt 491,000

720,000 Common Stock (144,000 $5)

1,440,000 Other Contributed Capital (144,000 $15 - $5))

* (144,000 $15) – [$362,000 + $2,013,000 – ($119,000 + $491,000)] = $395,000

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$700,000$20,000

Total shares issued = 144,000

$5$5

Fair value of stock issued (144,000 $15) = $2,160,000

Cost (Purchase Price)

Less: Fair Value of Net Assets Goodwill

$130,000 $ 10,000 $110,000 $ 20,000 $15,000 ($ 5,000)

Assets 30,000 20,000

Cost (Purchase Price)

Less: Fair Value of Net Assets Goodwill

Cost (Purchase Price)

Less: Fair Value of Net Assets Gain

Case A Case B Case C

20,000

80,000 40,000

Liabilities 20,000 40,000 Retained Earnings (Gain)

0 5,000

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2011: Step 1: Fair value of the reporting unit $400,000 Carrying value of identifiable net assets $330,000 Excess of carrying value over fair value $ 5,000

The excess of carrying value over fair value means that step 2 is required.

Step 2: Fair value of the reporting unit $400,000 Fair value of identifiable net assets Implied value of goodwill 60,000 Recorded value of goodwill ($450,000 - $375,000) Impairment loss $ 15,000

2012: Step 1: Fair value of the reporting unit $400,000 Carrying value of identifiable net assets $320,000 Carrying value of goodwill ($75,000 - $15,000) Excess of fair value over carrying value

The excess of fair value over carrying value means that step 2 is not required.

2013: Step 1: Fair value of the reporting unit $350,000 Carrying value of identifiable net assets $300,000 Carrying value of goodwill ($75,000 - $15,000) Excess of carrying value over fair value

The excess of carrying value over fair value means that step 2 is required.

Step 2: Fair value of the reporting unit $350,000 Fair value of identifiable net assets Implied value of goodwill 25,000 Recorded value of goodwill ($75,000 - $15,000) Impairment loss

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2011: Impairment Loss—Goodwill 15,000 Goodwill 15,000

2012: No entry

2013: Impairment Loss—Goodwill 35,000 Goodwill 35,000 FASB ASC paragraph 350-20-45-1 specifies the presentation of goodwill in the balance sheet and income statement (if impairment occurs) as follows:

The aggregate amount of goodwill should be a separate line item in the balance

sheet. The aggregate amount of losses from goodwill impairment should be shown as a

separate line item in the operating section of the income statement unless some of the impairment is associated with a discontinued operation (in which case it is shown net-of-tax in the discontinued operation section).

In a period in which an impairment loss occurs, FASB ASC paragraph 350-20-45-2 mandates the following disclosures in the notes:

(1) A description of the facts and circumstances leading to the impairment;

(2) The amount of the impairment loss and the method of determining the fair value of the reporting unit;

(3) The nature and amounts of any adjustments made to impairment estimates from earlier periods, if significant.

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