1 Advanced Accounting Autumn 2015 Class 2 Review (Chapter 1) Bill Myer – Autumn 2015

2 Homework Make sure you review the PPTs on advancedaccounting.yolasite.com If you have not done so already, send me an with the following information: Name (pin yin) Student number English name address Province you're from Pseudonym (false name)

3Bill Myer – Autumn 2015 Homework Read Chapter 1: Business Combinations Read Chapter 2: Stock Investments – Investor Accounting and Reporting Exercises page 19-20, E1-1 (1, 2, 4); E1-2; E1-4; E1-5 Problems P1-1, P1-2 Do P1-2 for homework On Thursday, we will have a PRACTICE QUIZ for Chapter 1

4Bill Myer – Autumn 2015 Review We have been discussing…  How to record acquisition costs  How to record an investment  How to allocate the cost of an investment to assets and liabilities  How to calculate goodwill  How to calculate a bargain purchase gain  How to prepare a “Day 1” balance sheet  We left off on slide 58

5Bill Myer – Autumn 2015 Balance Sheet – Review Below is the beginning balance sheet for Acquirer Corporation Suppose Acquirer Corp issues $10,000,000 of stock with no par value to acquire a company… …and does not dissolve the acquired company What are the journal entries? What does the new balance sheet look like? AssetsLiabilities & Shareholders’ Equity Cash5,000,000Current Liabilities5,000,000 Inventory10,000,000 Property15,000,000APIC30,000,000 Intangible Assets5,000,000

6Bill Myer – Autumn 2015 Income Statement – Review Below is the income statement for ABC Corporation Suppose ABC Corp has $10 million of revenues (all received in cash) and $7 million of expenses (all paid in cash) What are the journal entries? What does the income statement look like? What is the effect on the balance sheet? Income Statement Revenues??? Expenses??? Net Income???

7Bill Myer – Autumn 2015 Practice Exercises for Chapter 1 - #1 Journal entries for acquisition costs Perris Corporation buys Systems Corporation in a transaction that is accounted for as a business combination As a result of the transaction, Perris Corporation pays RMB20 million for registering and issuing securities Perris Corporation also pays RMB30 million for other costs of combination Prepare the journal entries to record the acquisition costs DR Business combination expense30,000,000 DR Additional paid-in capital20,000,000 CR Cash50,000,000

8Bill Myer – Autumn 2015 Practice Exercises for Chapter 1 - #2 Recording an acquisition – target company is not dissolved Parrot Corporation buys Sparrow Corporation in a transaction that is accounted for as a business combination. The total consideration paid by Parrot is RMB40 million, which includes RMB20 million in cash, RMB15 million in 10 million shares of Parrot’s common stock with a par value of $1 per share, and a RMB5 million note payable. Parrot Corporation does not dissolve Sparrow Corporation Prepare the journal entries on Parrot’s books to record the acquisition of Sparrow DR Investment in Sparrow40,000,000 CR Cash20,000,000 CR Common Stock (Par Value)10,000,000 CR APIC5,000,000 CR Note Payable5,000,000

9Bill Myer – Autumn 2015 Practice Exercises for Chapter 1 - #3 Recording an acquisition – target company is dissolved Peanut Corporation buys Sandwich Corporation in a transaction that is accounted for as a business combination. The total consideration paid is RMB55 million, all in cash Prepare the journal entries on Peanut’s books to record the acquisition of Sandwich, assuming that Sandwich is dissolved DR Investment in Sparrow55,000,000 CR Cash55,000,000 DR Cash5,000,000 DR Inventory15,000,000 DR Equipment20,000,000 DR Goodwill25,000,000 CR Accounts Payable10,000,000 CR Investment in Sparrow55,000,000

10Bill Myer – Autumn 2015 Practice Exercises for Chapter 1 - #4A Calculating goodwill & bargain purchase gain Parrot Corporation buys Sparrow Corporation in a transaction that is accounted for as a business combination. The total consideration paid by Parrot is RMB40 million. The book value of Sparrow Corporation’s net assets is RMB30 million. The fair value of Sparrow Corporation’s net assets is RMB45 million. What is the amount of goodwill? What is the amount of bargain purchase gain? 1.Consideration paid < FV of net assets  Bargain Purchase Gain 40 million (45 million) 5 million bargain purchase gain

11Bill Myer – Autumn 2015 Practice Exercises for Chapter 1 - #4B Calculating goodwill & bargain purchase gain Pillow Corporation buys Sofa Corporation in a transaction that is accounted for as a business combination The total consideration paid by Pillow is RMB55 million The book value of Sofa Corporation’s net assets is RMB35 million The fair value of Sofa Corporation’s net assets is RMB45 million What is the amount of goodwill? What is the amount of bargain purchase gain? 1.Consideration paid > FV of net assets  Goodwill 55 million (45 million) 10 million goodwill

12Bill Myer – Autumn 2015 Chapter 1 – P1-1 (page 21) Pine purchases Sain by issuing 30,000 shares with a $20 per share market value Pine pays $40,000 in acquisition costs Prepare the balance sheet after the acquisition 1)Record acquisition costs DR Acquisition expenses25,000 DR APIC15,000 CR Cash40,000 2)Record investment DR Investment in Sain600,000 CR Common Stock (Par)300,000 CR APIC300,000

13Bill Myer – Autumn 2015 Chapter 1 – P1-1 (page 21) 3)Dissolve Sain DR Current Assets100,000 DR Land100,000 DR Buildings400,000 DR Equipment240,000 CR Current Liabilities60,000 CR Investment in Sain600,000 CR Bargain Purchase Gain180,000 Check Bargain Purchase Gain: 600,000 investment (780,000) FV of net assets acquired 180,000 bargain purchase gain

14Bill Myer – Autumn 2015 Chapter 1 – P1-1 (page 21) 4)Prepare Balance Sheet PineSain Effects of Acquisition Day 1 Balance Sheet Current assets Land Buildings – net Equipment – net Total assets Current liabilities Capital stock, $10 par Paid-in capital Retained earnings Total liabilities & equity

15Bill Myer – Autumn 2015 Chapter 1 – P1-1 (page 21) 4)Prepare Balance Sheet PineSain Effects of Acquisition Day 1 Balance Sheet Current assets$130 Land50 Buildings – net300 Equipment – net220 Total assets$700 Current liabilities$ 50 Capital stock, $10 par500 Paid-in capital50 Retained earnings100 Total liabilities & equity$700

16Bill Myer – Autumn 2015 Chapter 1 – P1-1 (page 21) 4)Prepare Balance Sheet PineSain Effects of Acquisition Day 1 Balance Sheet Current assets$130$100 Land50100 Buildings – net Equipment – net Total assets$700$840 Current liabilities$ 50$ 60 Capital stock, $10 par500 Paid-in capital50 Retained earnings100 Total liabilities & equity$700

17Bill Myer – Autumn 2015 Chapter 1 – P1-1 (page 21) 4)Prepare Balance Sheet PineSain Effects of Acquisition Day 1 Balance Sheet Current assets$130$100($40) Land50100 Buildings – net Equipment – net Total assets$700$840 Current liabilities$ 50$ 60 Capital stock, $10 par500 Paid-in capital50(15) Retained earnings100(25) Total liabilities & equity$700

18Bill Myer – Autumn 2015 Chapter 1 – P1-1 (page 21) 4)Prepare Balance Sheet PineSainExpenses Stock Issuance Day 1 Balance Sheet Current assets$130$100($40) Land50100 Buildings – net Equipment – net Total assets$700$840 Current liabilities$ 50$ 60 Capital stock Paid-in capital50(15)300 Retained earnings100(25) Total L & OE$700

19Bill Myer – Autumn 2015 Chapter 1 – P1-1 (page 21) 4)Prepare Balance Sheet PineSainExpenses Stock Issuance Day 1 Balance Sheet Current assets$130$100($40)$190 Land Buildings – net Equipment – net Total assets$700$840($40)$1,500 Current liabilities$ 50$ 60$110 Capital stock Paid-in capital50(15) Retained earnings100(25)75 Total L & OE$700$ 60($40)$600$1,320 Does this balance? Why not?

20Bill Myer – Autumn 2015 Chapter 1 – P1-1 (page 21) 4)Prepare Balance Sheet PineSainExpenses Stock Issuance & Gain Day 1 Balance Sheet Current assets$130$100($40)$190 Land Buildings – net Equipment – net Total assets$700$840($40)$1,500 Current liabilities$ 50$ 60$110 Capital stock Paid-in capital50(15) Retained earnings100(25) Total L & OE$700$ 60($40)$780$1,500 Does this balance?