CHAPTER 5BUSINESS COMBINATIONS

The title of each problem is followed by the estimated time in minutes required for completion and by a difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 51 La Salle Corporation (15 minutes, easy)Journal entries for business combination (acquisition of net assets except cash), with bargain-purchase excess.

Pr. 52 Lionel Corporation (20 minutes, easy)Journal entries for business combination (acquisition of net assets) involving issuance of bonds, with goodwill recognized.

Pr. 53 Wabash Corporation (20 minutes, easy)Given journal entries for a statutory merger business combination involving issuance of bonds, prepare journal entries assuming the issuance of common stock.

Pr. 54 Combinor Corporation (20 minutes, easy)Journal entries for business combination involving the acquisition of net assets, with goodwill recognized.

Pr. 55 Consol Corporation (20 minutes, medium)Journal entries for statutory consolidation, with goodwill recognized.

Pr. 56 Silva Corporation (30 minutes, medium)From condensed balance sheets of surviving corporation prior to and subsequent to a statutory merger, reconstruct the issuer's journal entries for the business combination.

Pr. 57 Solomon Corporation (30 minutes medium)Prepare journal entries for statutory merger, under assumption of a business combination involving a bargain-purchase excess. Intercompany receivable and payable are involved.

Pr. 58 Value Corporation (20 minutes, easy)Accounting for business combination involving acquisition of combinee's net assets. Bargain-purchase excess must be allocated in accordance with FASB Statement No. 141, Business Combinations.

Pr. 59 Stave Corporation (50 minutes, medium)Journal entries for statutory merger business combination that involves recognition of goodwill.

Pr. 510 Coolidge Corporation (40 minutes, medium)Accounting for a business combination involving acquisition of net assets, contingent consideration, and bargain-purchase excess. Computation of and accounting for additional shares of common stock issued to settle contingent consideration.

Pr. 511 Solo Corporation (80 minutes, strong)Computation of historical and projected net income and basic earnings per share for merger business combination. Pro forma combined balance sheet following business combination.

ANSWERS TO REVIEW QUESTIONS

1. A business combination occurs when an entity acquires net assets that constitute a business or acquires interests of one or more other entities and obtains control over the entity or entities.

2. A statutory merger is a business combination that is consummated in accordance with applicable state law. In a merger, one corporationthe survivoracquires all the outstanding common stock of one or more other corporations, which are then liquidated. A statutory consolidation is

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similar to a merger in that it is consummated in accordance with applicable state law and involves the acquisition of two or more corporations' outstanding common stock. However, the survivor in a consolidation is a new corporation rather than an existing one.

3. One or both of the following methods are used to determine an appropriate price to pay in a business combination:Capitalization of expected average earnings of the combinee at a desired rate of return Determination of current fair value of the combinee's net assets (including goodwill)

4. The constituent company that issues cash, other assets, or debt instruments in a business combination is the combinor. In a business combination involving the issuance of common stock, the combinor generally is the constituent company whose former common stockholder interests either retain or receive the larger portion of the voting rights of the combined enterprise.

5. The following out-of-pocket costs are included in the determination of the total cost of the combinee:(a) Printing costs of proxy statement mailed to combinor's stockholders(b) Legal fees for negotiating the merger(f) CPA firm's fees for advice on income tax aspects of the mergerThe following out-of-pocket costs are offset against paid-in capital in excess of par of combinor common stock issued in the merger:(c) CPA firm's fees for auditing financial statements in SEC registration statement covering shares

of common stock issued in the merger(d) Printing costs for common stock certificates issued in the merger(e) Legal fees for SEC registration statement covering shares of common stock issued in the

merger6. Goodwill is the value assigned to the expectation of above-average or superior earnings from the

identifiable assets of a combinee. In accounting for a business combination, goodwill is the excess of the total cost of the combinee over the current fair values assignable to its identifiable net assets.Negative goodwill is a residual deferred credit in a business combination in which the cost of the combinee is less than the current fair values assignable to the combinee's identifiable net assets. The deficiency first is allocated pro rata to specified assets; any amount remaining after reducing the values of these assets to zero is recognized as an extraordinary gain.

7. Contingent consideration is additional cash, other assets, or securities that may be issuable in the future contingent on specified future events or transactions, such as a specified level of earnings, or a designated market price for a debt or an equity security issued to effect the business combination.

8. The total cost of a combinee in a business combination is allocated first to the identifiable assets acquired and liabilities assumed, based on their current fair values. Any excess of total cost over the amounts assigned is recognized as goodwill. Any excess of amounts assigned over total cost is applied pro rata to reduce the amounts otherwise assignable to certain assets specified by the FASB.

9. Preacquisition contingencies are contingent assets (other than potential income tax benefits of a loss carryforward), contingent liabilities, or contingent impairments of assets that existed prior to completion of a business combination.

10. The following combinee intangible assets other than goodwill are given accounting recognition in a business combination: Assets arising from contractual or legal rights, such as patents, copyrights, and franchises. Other assets that are separable from the combinee entity and can be sold, licensed, exchanged, and the like, such as customer lists and unpatented technology.

SOLUTIONS TO EXERCISESEx. 51 1. c 5. d

2. b 6. a3. b 7. b4. c 8. e

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Ex. 52 Journal entries for Sal Corporation, Jan. 31, 2005:Investment in Mel Company Common Stock (35,000 x $20) 700,000

Common Stock (35,000 x $1) 35,000Paid-in Capital in Excess of Par 665,000

Investment in Mel Company Common Stock 40,000Paid-in Capital in Excess of Par 70,000

Cash 110,000

Current Assets 120,000Other Assets 850,000Goodwill 90,000

Current Liabilities 80,000Long-Term Debt 240,000Investment in Mel Company Common Stock 740,000

Ex. 53 Computation of amount of goodwill in the business combination of Master Corporation and Geo Company, Mar. 31, 2005:

Total cost to Master of Geo's net assets except cash($700,000 + $100,000) $800,000

Less: Current fair value of Geo's identifiable net assets:Other current assets $140,000Plant Assets 920,000Current liabilities (80,000)Long-term debt (190,000 ) 790,000

Amount of goodwill $ 10,000

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Ex. 54 Journal entries for Combinor Company, Jan. 31, 2005:Investment in Net Assets of Combinee Company 625,257Discount on 6% Bonds Payable 74,743

6% Bonds Payable 700,000

Investment in Net Assets of Combinee Company 80,000Bond Issue Costs 110,000

Cash 190,000

Current Assets 320,000Plant Assets 680,000Other Assets 120,000Goodwill 85,257

Current Liabilities 200,000Long-Term Debt 300,000Investment in Net Assets of Combinee Company 705,257

Ex. 55 Journal entries for Combinor Company, Mar. 31, 2005:Investment in Net Assets of Combinee Company (100,000 x $5) 500,000

Common Stock (100,000 x $1) 100,000Paid-in Capital in Excess of Par 400,000

Investment in Net Assets of Combinee Company 70,000Paid-in Capital in Excess of Par 50,000

Cash 120,000

Current Assets 260,000Plant Assets 480,000Other Assets 150,000Goodwill 20,000

Current Liabilities 80,000Long-Term Debt 260,000Investment in Net Assets of Combinee Company 570,000

Ex. 56 Journal entries for Byers Corporation, May 31, 2005:Investment in Net Assets of Sellers Company 560,000

Cash 560,000

Investment in Net Assets of Sellers Company 60,000Cash 60,000

Other Current Assets 300,000Plant Assets 780,000Intangible Assets 130,000Goodwill 30,000

Liabilities 620,000Investment in Net Assets of Sellers Company 620,000

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Ex. 57 Journal entries for Acquirer Corporation, Sept. 26, 2005:Investment in Net Assets of Disposer Company 160,000

Cash 160,000

Investment in Net Assets of Disposer Company 10,000Cash 10,000

Other Current Assets 120,000Plant Assets [$150,000 ($10,000 x 15/20)] 142,500Intangible Assets [$50,000 ($10,000 x 5/20)] 47,500Discount on Long-Term Debt ($60,000 $50,000) 10,000

Current Liabilities 90,000Long-Term Debt 60,000Investment in Net Assets of Disposer Company 170,000

Ex. 58 Journal entries for Combinor Company, Dec. 31, 2005:Investment in Combinee Company Common Stock (100,000 x $5) 500,000

Common Stock (100,000 x $1) 100,000Paid-in Capital in Excess of Par 400,000

Investment in Combinee Company Common Stock 70,000Paid-in Capital in Excess of Par 50,000

Cash 120,000

Current Assets 200,000Plant Assets 400,000Other Assets 140,000Goodwill 170,000

Current Liabilities 80,000Long-Term Debt 260,000Investment in Combinee Company Common Stock 570,000

Ex. 59 Journal entries for Combinor Company, Sept. 24, 2005:Investment in Combinee Company Common Stock (100,000 x $30) 3,000,000

Common Stock (100,000 x $1) 100,000Paid-in Capital in Excess of Par 2,900,000

Investment in Combinee Company Common Stock 130,000Paid-in Capital in Excess of Par 50,000

Cash 180,000

Current Assets 200,000Plant Assets 700,000Other Assets 100,000Research and Development Expense 400,000Goodwill 2,130,000

Current Liabilities 100,000Long-Term Debt 300,000Investment in Combinee Company Common Stock 3,130,000

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Ex. 510 Journal entries for Bragg Corporation, Feb. 28, 2005:Investment in Nestor Company Common Stock (600,000 x $2) 1,200,000

Common Stock (600,000 x $1) 600,000Paid-in Capital in Excess of Par 600,000

Investment in Nestor Company Common Stock 8,000Cash 8,000

Current Assets 520,000Plant Assets 1,050,000Other Assets 310,000Goodwill 108,000

Current Liabilities 300,000Long-Term Debt 400,000Premium on Long-term Debt 80,000Investment in Nestor Company Common Stock 1,208,000

Ex. 511 Journal entries for Sorrel Corporation, Dec. 31, 2005:Investment in Maxim Company Common Stock (800,000 x $3) 2,400,000

Common Stock (800,000 x $1) 800,000Paid-in Capital in Excess of Par 1,600,000

Investment in Maxim Company Common Stock 30,000Paid-in Capital in Excess of Par 40,000

Cash 70,000

Current Assets 500,000Plant Assets 1,500,000Other Assets 200,000Goodwill 530,000

Current Liabilities 300,000Investment in Maxim Company Common Stock 2,430,000

Ex. 512 Journal entries for Combinor Corporation, Aug. 31, 2005:Investment in Combinee Common Stock (100,000 x $20) 2,000,000

Common Stock (100,000 x $1) 100,000Paid-in Capital in Excess of Par 1,900,000

Investment in Combinee Common Stock 100,000Paid-in Capital in Excess of Par 150,000

Cash 250,000

Current Assets 600,000Plant Assets 2,800,000Goodwill 100,000

Current Liabilities 400,000Long-term Debt 1,000,000Investment in Combinee Company Common Stock 2,100,000

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Ex. 513 a. Sullivan Corporation separate net income for 2005 $ 500,000Add: Mears Division net income, two months ended Dec. 31,

2005 50,000 Sullivan total net income for 2005 $ 550,000

b. Sullivan Corporation net income for 2005 $ 550,000Weighted-average number of shares of Sullivan common stock

outstanding during 2005:200,000 shares x 1 year 200,00050,000 shares x 1/6 year 8,333 208,333

Sullivan basic earnings per share for 2005 ($550,000 208,333) $2.64

c. Sullivan Corporation separate retained earnings, Dec. 31, 2005 $1,080,000Add: Mears Division net income, two months ended Dec. 31,

2005 50,000Sullivan retained earnings, Dec. 31, 2005 $1,130,000

Ex. 514 Journal entry for Tucker Corporation, Dec. 31, 2006:Paid-in Capital in Excess of Par (60,000 x $2) 120,000

Common Stock to be Issued for Contingent Consideration 120,000To record additional shares of common stock to be issued under terms of Dec. 31, 2005, acquisition of net assets of Loring Company, as follows:Required value of common stock issued in acquisition $1,600,000Less: Market value of common stock, Dec. 31, 2006

(100,000 x $10) 1,000,000Market value of additional common stock to be issued $ 600,000Number of additional shares of common stock to be

issued ($600,000 $10) 60,000

CASES

Case 51 Solamente Corporation's accounting for the out-of-pocket costs of the business combination with Mika Company does not comply with generally accepted accounting principles. Direct out-of-pocket costs incurred by a combinor in a combination are included in the total cost of the combinee. Legal fees and other out-of-pocket costs of the combination paid by Mika on behalf of Solamente should have been recognized as an account receivable by Mika and an account payable by Solamente; legal and other expenditures on its own behalf with respect to the combination with Solamente should have been recognized as expenses by Mika.

Case 52 TO: The Board of Directors, Software CompanyFROM: ___________________________________________, ControllerDATE: ________________________SUBJECT: Possible Recognition of Goodwill in Proposed Acquisition of Part of a Product Line of Midge CompanyGoodwill is not to be recognized in the subject proposed acquisition, despite projections that the acquisition cost will exceed the current fair value of identifiable net assets to be acquired. Goodwill is recognized only in the acquisition of an entire entity in a business combination; it traditionally is associated with the acquired entitys superior earnings compared with other enterprises in the industry. If the portion of the acquisition cost that exceeds the current fair value of the Midge Company identifiable net assets to be acquired cannot be assigned to sometimes-overlooked intangible assets such as an agreement not to compete or a customer

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list, it must be recognized as a loss of the accounting period in which the acquisition of the assets is completed.

Case 53 The journal entry prepared by Shane Corporations controller to record the transaction involving Merlo Company is incorrect in its recognition of common stock to be issued, because the contingency had not been resolved on the date of the business combination. A consequence of this error is the inappropriate recognition of goodwill and the overstatement of one or more assets other than goodwill. Likewise, the journal entry to record the transaction involving Merlo Industries inappropriately recognizes contingent consideration: the payable to George Merlo amount. Even if it were appropriate to record such payable, the $250,000 amount would have to be discounted to its present value on February 28, 2005, at an appropriate fair interest rate. Again, the goodwill of $150,000 should not have been recognized, and one or more assets should be written down for the $100,000 bargain purchase excess ($350,000 $250,000 = $100,000).One other point should be noted with respect to the controller's journal entry for the Merlo Industries, Inc., transaction. The controller should consider whether George Merlo's agreement not to compete with Shane Corporation is an intangible asset with a current fair value on the date of the combination. If so, part of the $250,000 cost should be debited to the Non-Compete Agreement ledger account and amortized over the five-year term of the agreement.

Case 54 In the business combination of Frank Electronics, Inc., and Lester Enterprises, Inc., Frank Electronics clearly is the combinor. After the issuance of 12,000 shares of Lester Enterprises common stock, Robert Frank would own 54.5% [12,000 (10,000 + 12,000) = 0.545] of Lester Enterprises outstanding common stock. The 5,000 shares of Lester Enterprises unissued common stock to which George Lester had subscribed are not outstanding; further, many accountants believe that the balance of the Common Stock Subscriptions Receivable account should be offset against the balance of the Common Stock Subscribed account; for Lester Enterprises, Inc.; this would result in zero paid-in capital from stock subscriptions. Accordingly, even though Lester Enterprises, Inc., is the survivor in the proposed merger with Frank Electronics, Inc., the latter is the combinor, and its net assets must be recognized at carrying value in the post-merger balance sheet of Lester Enterprises.A further problem in the merger as proposed was the assignment of a $40 per share fair value for the 12,000 shares of Lester Enterprises common stock to be issued to Robert Frank. Because Lester Enterprises is a shell corporation with no operating assets, the fair value of the 12,000 shares to be issued to Robert Frank should not exceed the $9.50 [($80,000 + $11,000 + $4,000) 10,000 = $9.50] carrying amount (book value) per share of the 10,000 shares of outstanding common stock of Lester Enterprises, Inc. This issue is moot, however, given that Frank Electronics, not Lester Enterprises, is the combinor in the merger of the two corporations.

Case 55 Students who agree with the FASBs conclusion that core goodwill meets the FASBs definition of asset might be persuaded by the analysis of the components of core goodwill (as defined in paragraph B105 of FASB Statement No. 141. Few accountants would quarrel with a definition of goodwill that encompassed the fair value of the going concern element of the combinees existing business and the fair values of the expected synergies and other benefits of the business combination. Students who disagree with the FASBs conclusion that core goodwill meets the FASBs definition of asset might not be persuaded that the FASBs discussion of probable future economic benefits of goodwill in paragraphs B111 through B114 of FASB Statement No. 141 clearly supports the conclusion that goodwill has such benefits. Thus, FASB Statement No. 141 likely will not still the controversy of recognition of goodwill as an asset.

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15 Minutes, EasyLa Salle Corporation Pr. 51

La Salle CorporationJournal Entries

20 05Jan 31 Investment in Net Assets of De Soto Company 5 4 0 0 0 0

Cash 5 4 0 0 0 0To record acquisition of net assets of De Soto Company

31 Investment in Net Assets of De Soto Company 6 0 0 0 0Cash 6 0 0 0 0

To record payment of costs incurred in acquisition ofnet assets of De Soto Company.

31 Other Current Assets 3 0 0 0 0 0Plant assets [$874,000 ($30,000 x 0.92)] 8 4 6 4 0 0Intangible Assets [$76,000 ($30,000 x 0.08)] 7 3 6 0 0

Liabilities 6 2 0 0 0 0Investment in Net Assets of De Soto Company ($540,000 + $60,000) 6 0 0 0 0 0

To allocate total cost of net assets acquired to identifiable net assets, with excess of current fair valueof the net assets over total cost prorated to noncurrentassets in the ratio of 874:76, or 92%:8%. (Incometax effects are disregarded.)

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20 Minutes, EasyLionel Corporation Pr. 52

Lionel CorporationJournal Entries

20 05Aug 31 Investment in Net Assets of Cooper Company

[($1,000,000 x 0.258419) + ($50,000 x 10.594014)] 7 8 8 1 2 0Discount on Bonds Payable 2 1 1 8 8 0

Bonds Payable 1 0 0 0 0 0 0To record acquisition of net assets of Cooper Co.

31 Bond Issue Costs 6 0 0 0 0Investment in Net Assets of Cooper Company 4 0 0 0 0

Cash 1 0 0 0 0 0To record payment of costs incurred in acquisition of net assets of Cooper Company.

31 Current Assets 2 2 0 0 0 0Plant Assets 7 0 0 0 0 0Intangible Assets 9 0 0 0 0Discount on Long-Term Debt ($200,000 $190,000) 1 0 0 0 0Goodwill 8 8 1 2 0

Current Liabilities 8 0 0 0 0Long-Term Debt 2 0 0 0 0 0Investment in Net Assets of Cooper Co. ($788,120 + $40,000) 8 2 8 1 2 0

To allocate total cost of net assets investment toidentifiable assets and liabilities, with remainder to goodwill. Amount of goodwill is computed as follows:

Total cost of investment $828,120Less: Current fair value of identifiable net assets ($1,010,000 $270,000) 740,000 Amount of goodwill $ 88,120

(income tax effects are disregarded.)

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20 Minutes, EasyWabash Corporation Pr. 53

Wabash CorporationJournal Entries

20 05Dec 31 Investment in Indiana Company

Common Stock (1,000,000 x $10) 10 0 0 0 0 0 0Common Stock 10 0 0 0 0 0 0

31 Investment in Indiana Company Common Stock 1 5 0 0 0 0Common Stock 5 0 0 0 0

Cash 2 0 0 0 0 0

31 Current Assets 3 7 0 0 0 0 0Plant Assets [$9,900,000 ($10,250,000 $10,150,000)] 9 8 0 0 0 0 0

Current Liabilities 3 3 5 0 0 0 0Investment in Indiana Company Common Stock 10 1 5 0 0 0 0

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20 Minutes, EasyCombinor Corporation Pr. 54

Combinor CorporationJournal Entries

20 05Oct 31 Investment in Net Assets of Combinee Company

(100,000 x $13) 1 3 0 0 0 0 0Common Stock (100,000 x $10) 1 0 0 0 0 0 0Paid-in Capital in Excess of Par 3 0 0 0 0 0

To record acquisition of net assets of Combinee Company

31 Investment in Net Assets of Combinee Company 1 8 0 0 0 0Paid-in Capital in Excess of Par 1 2 0 0 0 0

Cash 3 0 0 0 0 0To record payment of costs incurred in acquisition of net assets of Combinee Company. Legal, accounting,and finders fees in connection with the acquisition arerecorded as an investment cost; other out-of-pocketcosts are recorded as a reduction in the proceeds fromissuance of common stock.

31 Cash 6 0 0 0 0Other Current Assets 5 0 0 0 0 0Plant Assets (net) 1 0 0 0 0 0 0Discount on Long-Term Debt ($250,000 $240,000) 1 0 0 0 0Goodwill ($1,480,000 $1,140,000) 3 4 0 0 0 0

Current Liabilities 1 8 0 0 0 0Long-Term Debt 2 5 0 0 0 0Investment in Net Assets of Combinee Co. ($1,300,000 + $180,000) 1 4 8 0 0 0 0

To allocate total cost of net assets investment to identifiable assets and liabilities, with remainder togoodwill. (Income tax effects are disregarded.)

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20 Minutes, EasyConsol Corporation Pr. 55

Consol CorporationJournal Entries

20 05July 31 Investment in Conner Company and Capsol Company

Common Stock (75,000 x $14) 1 0 5 0 0 0 0Common Stock (75,000 x $10) 7 5 0 0 0 0Paid-in Capital in Excess of Par 3 0 0 0 0 0

To record statutory consolidation of Conner Companyand Capsol Company.

31 Assets ($800,000 + $670,000) 1 4 7 0 0 0 0Goodwill ($1,050,000 $870,000) 1 8 0 0 0 0

Liabilities ($300,000 + $300,000) 6 0 0 0 0 0Investment in Conner Co. and Capsol Company Common Stock 1 0 5 0 0 0 0

To allocate total cost of investment in Conner Companyand Capsol Company to identifiable assets and liabilities, with remainder to goodwill. Assets and liabilities of Capsol (the combinor) are recorded at carrying amounts; assets and liabilities of Conner (the combinee) are recorded at current fair value. (Incometax effects are disregarded.)

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30 Minutes, MediumSilva Corporation Pr. 56

Silva CorporationJournal Entries

20 05Mar 1 Investment in Marvel Company Common Stock 8 7 0 0 0 0

Common Stock ($700,000 $400,000) 3 0 0 0 0 0Additional Paid-in Capital 5 7 0 0 0 0

1 Investment in Marvel Company Common Stock ($50,000 $20,000) 3 0 0 0 0Additional Paid-in Capital [$860,000 $310,000) $570,000] 2 0 0 0 0

Cash 5 0 0 0 0

1 Current Assets [($850,000 $500,000) + $50,000 cash paid] 4 0 0 0 0 0Plant Assets ($1,800,000 - $1,000,000) 8 0 0 0 0 0

Current Liabilities ($600,000 - $350,000) 2 5 0 0 0 0Premium on Long-term Debt ($150,000 $100,000) 5 0 0 0 0Investment in Marvel Company Common Stock ($870,000 + $30,000) 9 0 0 0 0 0

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30 Minutes, MediumSolomon Corporation Pr. 57

Solomon CorporationJournal Entries

20 05Oct 31 Investment in Midland Company Common Stock

(20,000 x $20) 4 0 0 0 0 0Common Stock (20,000 x $1) 2 0 0 0 0Paid-in Capital in Excess of Par 3 8 0 0 0 0

To record merger with Midland Company.

31 Investment in Midland Company Common Stock 2 0 8 7 0Paid-in Capital in Excess of Par 3 1 1 3 0

Cash 5 2 0 0 0To record payment of costs incurred in merger withMidland Company. Direct costs of the combination arerecorded as an investment cost; costs of registering and issuing common stock are recorded as a reduction in the proceeds received from issuance ofcommon stock.

31 Inventories 1 7 0 0 0 0Other Current Assets 8 0 0 0 0Plant Assets (net) 4 2 0 0 0 0Goodwill ($420,870 $370,000) 5 0 8 7 0

Receivable from Midland Company 7 5 0 0 0Other Liabilities 2 2 5 0 0 0Investment in Midland Company Common Stock ($400,000 + $20,870) 4 2 0 8 7 0

To allocate total cost of Midland Company investmentto identifiable assets and liabilities, with the remainder to goodwill, and to offset receivable from Midland against Midlands related payable. (Income tax effectsare disregarded.)

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20 Minutes, EasyValue Corporation Pr. 58

Value CorporationJournal Entries

20 05Apr 1 Investment in Net Assets of Edgar Company

[(50,000 x $14) + $225,000] 9 2 5 0 0 0Cash 2 2 5 0 0 0Common Stock (50,000 x $14) 7 0 0 0 0 0

To record issuance of cash and 50,000 shares ofcommon stock for net assets of Edgar Company.

1 Investment in Net Assets of Edgar Company (account- ing, legal, and finders fees) 5 0 0 0 0Common Stock (issue costs) 7 5 0 0 0

Cash 1 2 5 0 0 0To record payment of out-of-pocket costs incurred inacquisition of net assets of Edgar Company.

1 Current Assets 5 7 5 0 0 0Plant Assets (net) ($1,200,000 $96,000) 1 1 0 4 0 0 0Patent (net) ($50,000 $4,000) 4 6 0 0 0

Current Liabilities 3 0 0 0 0 0Long-Term Debt 4 0 0 0 0 0Premium on Long-Term Debt 5 0 0 0 0Investment in Net Assets of Edgar Company ($925,000 + $50,000) 9 7 5 0 0 0

To allocate total cost of net assets investment to identifiable assets and liabilities, with $100,000* excess of current fair value of the net assets over total cost prorated to noncurrent assets in ratio of $1,200,000:$50,000, or 96%:4%. (Income tax effectsare disregarded.)

*Current fair value of Edgars identifiable net assets [($575,000 + $1,200,000 + $50,000) ($300,000 + $450,000)] $1,075,000Less: Total cost of Values investment ($925,000 + $50,000) 975,000 Excess of current fair value of net assets over total cost $ 100,000

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50 Minutes, MediumStave Corporation Pr. 59

Stave CorporationJournal Entries

20 05Apr 30 Investment in Molo Company Common Stock 20 0 0 0 0 0 0

Cash 3 1 0 0 0 0 010% Bonds Payable 16 9 0 0 0 0 0

To record merger with Molo Company as a purchase.

30 Investment in Molo Company Common Stock 1 5 0 0 0Bond Issue Costs 1 0 0 0 0

Cash 2 5 0 0 0To record payment of out-of-pocket costs incurred inmerger with Molo Company.

30 Current Assets 3 4 0 0 0 0 0Plant Assets 14 0 0 0 0 0 0Patents (net) 3 6 0 0 0 0Goodwill ($20,015,000 $15,660,000) 4 3 5 5 0 0 0

Liabilities 2 1 0 0 0 0 0Investment in Molo Company Common Stock

($20,000,000 + $15,000) 20 0 1 5 0 0 0To allocate total cost of Molo Company investmentto identifiable assets and liabilities, with remainder togoodwill. (Income tax effects are disregarded.)

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40 Minutes, MediumCoolidge Corporation Pr. 510

Coolidge CorporationJournal Entries

a.20 05

Sept 30 Investment in Net Assets of Hoover Company [(50,000 x $20) + $850,000] 1 8 5 0 0 0 0

Common Stock (50,000 x $10) 5 0 0 0 0 0Paid-in Capital in Excess of Par 5 0 0 0 0 0Cash 8 5 0 0 0 0

To record issuance of cash and 50,000 shares of common stock for net assets of Hoover Company.

30 Investment in Net Assets of Hoover Company ($35,000 + $15,000) 5 0 0 0 0Paid-in Capital in Excess of Par 7 5 3 5 0

Cash 1 2 5 3 5 0To record payment of out-of-pocket costs incurred inacquisition of net assets of Hoover Company.

30 Trade Accounts Receivable (net) 3 0 0 0 0 0Inventories 6 8 0 0 0 0Short-Term Prepayments 2 0 0 0 0Investment in Truman Company Common Stock 1 8 0 0 0 0Land ($650,000 $32,000) 6 1 7 5 0 0Other Plant Assets (net) ($1,250,000 $62,500) 1 1 8 7 5 0 0Patent (net) ($100,000 $5,000) 9 5 0 0 0Discount on Long-Term Debt ($500,000 $480,000) 2 0 0 0 0

Current Liabilities 7 0 0 0 0 0Long-Term Debt 5 0 0 0 0 0Investment in Net Assets of Hoover Company ($1,850,000 + $50,000) 1 9 0 0 0 0 0

To allocate total cost of net assets investment to identifiable assets and liabilities, with $100,000 excessof current fair value of the net assets over total costprorated to noncurrent assets, other than investmentin marketable securities, in ratio of $650,000:$1,250,000:$100,000 or 32 %:62 %:5%.

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Coolidge Corporation (concluded) Pr. 510

Coolidge Corporation

Journal Entries

b.20 06

Sept 30 Paid-in Capital in Excess of Par 1 2 5 0 0 0Common Stock (12,500 x $10) 1 2 5 0 0 0

To record issuance of additional shares of common stock in settlement of contingent consideration provision of business combination with Hoover Co.,as follows:

Agreed market value of common stock, Sept. 30, 2006 (50,000 x $20) $1,000,000Less: Market value, Sept. 30, 2006, of shares of common stock issued Sept. 30, 2005 (50,000 x $16) 800,000Market value of additional shares of common stock to be issued $ 200,000Market value per share, Sept. 30, 2006 $ 16Additional whole shares of common stock to be issued ($200,000 $16) 12,500

80 Minutes, StrongSolo Corporation Pr. 511a. Solo Corporation

Net Income and Earnings per ShareFor Year Ended October 31, 2003

Solo Corporation net income $ 1 8 0 0 0 0Number of shares of common stock outstanding 6 0 0 0 0Basic earnings per share ($180,000 60,000) $ 3 00

b. Solo Corporation Net Income and Earnings per ShareFor Year Ending October 31, 2006

Solo Corporation net income: Year ended Oct. 31, 2006 (same for 2005) $ 1 8 0 0 0 0 Interest expense ($200,000 x 0.15) ( 3 0 0 0 0 ) $ 1 5 0 0 0 0Mono Company net income: Year ended Oct. 31, 2006 (same for 2005) $ 9 0 0 0 0Adjustments for purchased assets: Cost of goods sold ($230,000 $200,000) ( 3 0 0 0 0 ) Depreciation ($40,000 5) ( 8 0 0 0 ) Leasehold amortization ($20,000 4) ( 5 0 0 0 ) Goodwill impairment loss - 0 - 4 7 0 0 0Combined net income $ 1 9 7 0 0 0Number of shares of common stock outstanding (60,000 + 15,000) 7 5 0 0 0Basic earnings per share ($197,000 75,000) $ 2 63

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 5 196

Solo Corporation Pr. 511

Solo Corporation

Pro Forma Combined Balance Sheets

c. October 31, 2005

AssetsCurrents assets ($688,000 + $30,000 $100,000) $ 6 1 8 0 0 0

Plant assets (net) ($2,500,000 + $100,000) 2 6 0 0 0 0 0

Other assets ($300,000 + $120,000) 4 2 0 0 0 0

Goodwill ($605,000 $550,000) 5 5 0 0 0

Total assets $ 3 6 9 3 0 0 0

Liabilities & Stockholders EquityCurrent liabilities ($400,000 + $100,000) $ 5 0 0 0 0 0

Long-term debt ($1,800,000 + $200,000) 2 0 0 0 0 0 0

Common stock (75,000 x $10) 7 5 0 0 0 0

Paid-in capital in excess of par ($100,000 + $150,000 $7,000) 2 4 3 0 0 0

Retained earnings ($200,000 no adjustment necessary) 2 0 0 0 0 0 Total liabilities & stockholders equity $ 3 6 9 3 0 0 0

The McGraw-Hill Companies, Inc., 2006197 Modern Advanced Accounting, 10/e

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