2. Advanced Accounting, Fourth Edition2
Accounting for Business Combinations
Advanced Accounting, Fourth Edition

3. Learning Objectives
Describe the major changes in the accounting for business combinations passed by the FASB in December 2007, and the reasons for those changes.
Describe the two major changes in the accounting for business combinations approved by the FASB in 2001, as well as the reasons for those changes.
Discuss the goodwill impairment test described in SFAS No. 142 [ASC 350–20–35], including its frequency, the steps laid out in the new standard, and some of the likely implementation problems.
Explain how acquisition expenses are reported.
Describe the use of pro forma statements in business combinations.
Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method.
Explain how contingent consideration affects the valuation of assets acquired in a business combination accounted for by the acquisition method.
Describe a leveraged buyout.
Describe the disclosure requirements according to SFAS No. 141R [ASC 805–10–50], “Business Combinations,” related to each business combination that takes place during a given year.
Describe at least one of the differences between U.S. GAAP and IFRS related to the accounting for business combinations.

4. Historical Perspective on Business Combinations
What’s New?
SFAS No. 141R [ASC 805], “Business Combinations,” would replace FASB Statement No. 141.
Continues to support the use of a single method.
Uses the term “acquisition method” rather than “purchase method.”
The acquired business should be recognized at its fair value on the acquisition date rather than its cost, regardless of whether the acquirer purchases all or only a controlling percentage;
and the fair values of all assets and liabilities on the acquisitions date defined as the date the acquirer obtains control of the acquiree, are reflected in the financial statement.
Issued on December 2007
In 2007, FASB shook up the accounting community in the area of business combinations by releasing two standards. The first, SFAS No141R (ASC 805).
This pronouncement supports the use of a single method in accounting for business combinations and uses the term of …….
In the accounting for business combinations there are two methods for combinations pooling methods and purchases method.
Using a single method for all acquisitions makes financial statements more comparable across firms than two methods for similar events.
The core of this change is that the acquired business should be …….

5. Historical Perspective on Business Combinations
What’s New?
[ASC 810], “Noncontrolling Interests In Consolidated
Financial Statements,” will replace Accounting Research Bulletin (ARB) No. 51.
Establishes standards for the reporting of the noncontrolling interest when the acquirer obtains control without purchasing 100% of the acquiree.
Additional discussion in Chapter 3.
Issued on December 2007
The second standards, that issued in 2007 noncontrolling interest in consolidated financial statement and this standard replaced Accounting research Bulletin (ARB) No.51
This pronouncement establishes……….
LO 1 FASB’s two major changes for business combinations.

6. Historical Perspective on Business Combinations
Historically, there are two methods permitted in the USA: purchase and pooling of interests methods.
Pronouncements in June 2001:
SFAS No. 141, “Business Combinations,” - pooling method is prohibited for business combinations initiated after June 30, 2001.
SFAS No. 142, “Goodwill and Other Intangible Assets,” - Goodwill acquired in a business combination after June 30, 2001, should not be amortized but it must be tested periodically.(we have to test goodwill impairment)
With the issuance of SFAS No 141 and SFAS No.142
LO 2 FASB’s two major changes of 2001.

7. Perspective on Business Combinations
Goodwill Impairment Test
SFAS No. 142 [ASC ] requires impairment be tested annually.
All goodwill must be assigned to a reporting unit.
Impairment should be tested in a two-step process.
Step 1: If fair value is less than the carrying amount of the net assets (including goodwill), then perform a second step to determine possible impairment.
Step 2: Determine the fair value of the goodwill (implied value of goodwill) and compare to carrying amount.
For purposes of the goodwill impairment test, all goodwill
LO 3 Goodwill impairment assessment.

8. LO 3

9. ****How we can determine the fair value ????
The fair value of a company may by based on one of the following:
1- Quoted market prices.
2-Prices of comparable business.
3- A present value.
4- other valuation technique.

10. Perspective on Business Combinations
E2-10: On January 1, 2010, Porsche Company acquired the net assets of Saab Company for $450,000 cash. The fair value of Saab’s identifiable net assets was $375,000 on this date. Porsche Company decided to measure goodwill impairment using the present value of future cash flows to estimate the fair value of the reporting unit (Saab). The information for these subsequent years is as follows: *
* Not including goodwill
LO 3 Goodwill impairment assessment.

11. Perspective on Business Combinations
E2-10: On January 1, 2010, the acquisition date, what was the amount of goodwill acquired, if any?
Acquisition price $450,000
Fair value of identifiable net assets 375,000
Recorded value of Goodwill $ 75,000
LO 3 Goodwill impairment assessment.

12. Perspective on Business Combinations
E2-10: Part A&B: For each year determine the amount of goodwill impairment, if any, and prepare the journal entry needed each year to record the goodwill impairment (if any).
Step
Fair value of reporting unit $400,000
Carrying value of unit:
Carrying value of identifiable net assets 330,000
Carrying value of goodwill 75,000
Total carrying value of unit 405,000
Excess of carrying value over fair value $ 5,000
Excess of carrying value over fair value means step 2 is required.
LO 3 Goodwill impairment assessment.

13. Perspective on Business Combinations
E2-10: Part A&B (continued)
Step
Fair value of reporting unit $400,000
Fair value of identifiable net assets 340,000
Implied value of goodwill 60,000
Carrying value of goodwill 75,000
Impairment loss $ 15,000
Journal
Entry
Impairment loss 15,000
Goodwill 15,000
LO 3 Goodwill impairment assessment.

14. Perspective on Business Combinations
E2-10: Part A&B (continued)
Step
Fair value of reporting unit $400,000
Carrying value of unit:
Carrying value of identifiable net assets 320,000
Carrying value of goodwill 60,000 *
Total carrying value of unit 380,000
Excess of fair value over carrying value $ 20,000
Excess of fair value over carrying value means step 2 is not required.
* $75,000 (original goodwill) – $15,000 (prior year impairment)
LO 3 Goodwill impairment assessment.

15. Perspective on Business Combinations
E2-10: Part A&B (continued)
Step
Fair value of reporting unit $350,000
Carrying value of unit:
Carrying value of identifiable net assets 300,000
Carrying value of goodwill 60,000 *
Total carrying value of unit 360,000
Excess of carrying value over fair value $ 10,000
Excess of carrying value over fair value means step 2 is required.
* $75,000 (original goodwill) – $15,000 (prior year impairment)
LO 3 Goodwill impairment assessment.

16. Perspective on Business Combinations
E2-10: Part A&B (continued)
Step
Fair value of reporting unit $350,000
Fair value of identifiable net assets 325,000
Implied value of goodwill 25,000
Carrying value of goodwill 60,000
Impairment loss $ 35,000
Journal
Entry
Impairment loss 35,000
Goodwill 35,000
LO 3 Goodwill impairment assessment.

17. Perspective on Business Combinations
Review Question
The first step in determining goodwill impairment involves comparing the
implied value of a reporting unit to its carrying amount (goodwill excluded).
fair value of a reporting unit to its carrying amount (goodwill excluded).
implied value of a reporting unit to its carrying amount (goodwill included).
fair value of a reporting unit to its carrying amount (goodwill included).
LO 3 Goodwill impairment assessment.

18. Disclosures Mandated by FASB
SFAS No. 141R (ASC 805) requires the following disclosures for goodwill:
Total amount of acquired goodwill and the amount expected to be deductible for tax purposes.
SFAS No. 141R (ASC 805) requires the following disclosures for goodwill:

19. Disclosures Mandated by FASB
SFAS No. 142 [ASC ] specifies the presentation of goodwill (if impairment occurs):
Aggregate amount of goodwill should be a separate line item in the balance sheet.
Aggregate amount of losses from goodwill impairment should be a separate line item in the operating section of the income statement.

20. Disclosures Mandated by FASB
When an impairment loss occurs, SFAS No. 142 [ASC ] mandates note disclosure:
Description of facts and circumstances leading to the impairment.
Amount of impairment loss and method of determining the fair value of the reporting unit.
Nature and amounts of any adjustments made to impairment estimates from earlier periods, if significant.

21. Other Required Disclosures
SFAS No. 141R [ASC ] states that disclosure should include:
The name and a description of the acquiree.
The acquisition date.
The percentage of voting equity instruments acquired.
The primary reasons for the business combination, including a description of the factors that contributed to the recognition of goodwill.

22. Other Required Disclosures
SFAS No. 141R [para ] states that disclosure should include:
The fair value of the acquiree and the basis for measuring that value on the acquisition date.
The fair value of the consideration transferred.
The amounts recognized at the acquisition date for each major class of assets acquired and liabilities assumed.

23. Perspective on Business Combinations
Other Intangible Assets
Acquired intangible assets other than goodwill:
Limited useful life
Should be amortized over its useful economic life.
Should be reviewed for impairment.
Indefinite life
Should not be amortized.
Should be tested annually (minimum) for impairment.
LO 3 Goodwill impairment assessment.

24. Treatment of Acquisition Expenses
The Exposure Draft requires that:
both direct and indirect costs be expensed.
Direct: as advisory, legal, accounting, valuation and other professional or consulting fees.
Indirect: ongoing costs include the cost of maintain a mergers and acquisions department and other general administrative costs and any overhead cost.
the cost of issuing securities also be excluded from the consideration.
Security issuance costs are assigned to the valuation of the security, thus reducing the additional contributed capital for stock issues or adjusting the premium or discount on bond issues.
Consideration التعويض المالي
Direct: as advisory, legal, accounting, valuation and other professional or consulting fees.
Indirect: ongoing costs include the cost of maintain a mergers and acquisions department and other general administrative costs and any overhead cost.

25. Acquisition Costs—an Illustration
Suppose that SMC Company acquires 100% of the net assets of Bee Company (net book value of $100,000) by issuing shares of common stock with a fair value of $120,000. With respect to the merger, SMC incurred $1,500 of accounting and consulting costs and $3,000 of stock issue costs. SMC maintains a mergers department that incurred a monthly cost of $2,000. Prepare the journal entry to record these direct and indirect costs.
Professional Fees Expense (Direct) 1,500
Merger Department Expense (Indirect) 2,000
Other Contributed Capital (Security Issue Costs) 3,000
Cash 6,500

26. Pro Forma Statements and Disclosure Requirement
Pro forma statements serve two functions in relation to business combinations:
to provide information in the planning stages of the combination and
to disclose relevant information subsequent to the combination.
Pro forma statement, sometimes called ‘’as if’’ statement, are prepared to show the effect of planned or contemplated transactions
Pro forma statement, sometimes called ‘’as if’’ statement, are prepared to show the effect of planned or contemplated transactions
تسمي قائمة كما لو وتعد في مراحل التخطيط للاندماج وبعد الاندماج

27. Pro Forma Statements and Disclosure Requirement
P Company Pro Forma Balance Sheet
Giving Effect to Proposed Issue of Common Stock for All the Net Assets of S Company January 1, 2009
Illustration 2-1

28. Pro Forma Statements and Disclosure Requirement
If a material business combination occurred, notes to financial statements should include on a pro forma basis:
Results of operations for the current year as though the companies had combined at the beginning of the year.
Results of operations for the immediately preceding period as though the companies had combined at the beginning of that period if comparative financial statements are presented.

29. Explanation and Illustration of Acquisition Accounting
Four steps in the accounting for a business combination:
Identify the acquirer.
Determine the acquisition date.
Measure the fair value of the acquiree.
Measure and recognize the assets acquired and liabilities assumed.
LO 6 Valuation of acquired assets and liabilities assumed.

30. Explanation and Illustration of Acquisition Accounting
Value of Assets and Liabilities Acquired
Identifiable assets acquired (including intangibles other than goodwill) and liabilities assumed should be recorded at their fair values at the date of acquisition.
Any excess of total cost over the fair value amounts assigned to identifiable assets and liabilities is recorded as goodwill.
SFAS No. 141R [ASC ], states in-process R&D is measured and recorded at fair value as an asset on the acquisition date.
LO 6 Valuation of acquired assets and liabilities assumed.

31. Explanation and Illustration of Acquisition Accounting
E2-1: Preston Company acquired the assets (except for cash) and assumed the liabilities of Saville Company. Immediately prior to the acquisition, Saville Company’s balance sheet was as follows:
Any Goodwill?
LO 6 Valuation of acquired assets and liabilities assumed.

32. Explanation and Illustration of Acquisition Accounting
E2-1: Preston Company acquired the assets (except for cash) and assumed the liabilities of Saville Company. Immediately prior to the acquisition, Saville Company’s balance sheet was as follows:
Fair value of assets, without cash $1,824,000
LO 6 Valuation of acquired assets and liabilities assumed.

33. Explanation and Illustration of Acquisition Accounting
E2-1: A. Prepare the journal entry on the books of Preston Co. to record the purchase of the assets and assumption of the liabilities of Saville Co. if the amount paid was $1,560,000 in cash.
Calculation of Goodwill
Fair value of assets, without cash $1,824,000
Fair value of liabilities 594,000
Fair value of net assets 1,230,000
Price paid 1,560,000
Goodwill $ 330,000
LO 6 Valuation of acquired assets and liabilities assumed.

34. Explanation and Illustration of Acquisition Accounting
E2-1: A. Prepare the journal entry on the books of Preston Co. to record the purchase of the assets and assumption of the liabilities of Saville Co. if the amount paid was $1,560,000 in cash.
Receivables 228,000
Inventory 396,000
Plant and equipment 540,000
Land 660,000
Part B
Receivables
228,000
Inventory
396,000
Plant and Equipment
540,000
Land
660,000
Liabilities
594,000
Cash
990,000
Gain on Business Combination ($1,230,000 - $990,000)
240,000
Goodwill 330,000
Liabilities 594,000
Cash 1,560,000
LO 6 Valuation of acquired assets and liabilities assumed.

35. Explanation and Illustration of Acquisition Accounting
Bargain Purchase
When the fair values of identifiable net assets (assets less liabilities) exceeds the total cost of the acquired company, the acquisition is a bargain.
Current standards require:
any excess of acquisition-date fair value of net assets over the consideration paid is recognized in income.

36. Explanation and Illustration of Acquisition Accounting
Bargain Acquisition Illustration
When the price paid to acquire another firm is lower than the fair value of identifiable net assets (assets minus liabilities), the acquisition is referred to as a bargain (negative goodwill).
Under SFAS No. 141R:
Any previously recorded goodwill on the seller’s books is eliminated.
LO 6 Valuation of acquired assets and liabilities assumed.

37. Explanation and Illustration of Acquisition Accounting
E2-1: B. Repeat the requirement in (A) assuming that the amount paid was $990,000.
Calculation of Goodwill or Bargain Purchase
Fair value of assets, without cash $1,824,000
Fair value of liabilities 594,000
Fair value of net assets 1,230,000
Price paid 990,000
Bargain purchase $ 240,000
LO 6 Valuation of acquired assets and liabilities assumed.

38. Explanation and Illustration of Acquisition Accounting
E2-1: B. Repeat the requirement in (A) assuming that the amount paid was $990,000.
Receivables 228,000
Inventory 396,000
Plant and equipment 540,000
Land 660,000
Liabilities 594,000
Cash 990,000
Gain on acquisition 240,000
LO 6 Valuation of acquired assets and liabilities assumed.

39. Contingent Consideration in an Acquisition
Purchase agreements may provide that the purchasing company will give additional consideration to the seller if certain future events or transactions occur.
The contingency may require
the payment of cash (or other assets) or
the issuance of additional securities.
Contingent lمشروطة

40. Illustration: P Company acquired all the net assets of S Company in exchange for P Company’s common stock. P Company also agreed to pay an additional $150,000 to the former stockholders of S Company if the average post-combination earnings over the next two years equaled or exceeded $800,000. Assume that the contingency is expected to be met, and goodwill was recorded in the original acquisition transaction. To complete the recording of the acquisition,
P Company will make the following entry:
Goodwill 150,000
Liability for Contingent Consideration 150,000

41. Liability for Contingent Consideration 150,000 Cash 150,000
Illustration: Assuming that the target is met, P Company will make the following entry:
Liability for Contingent Consideration 150,000
Cash 150,000
On the other hand, assume that the target is not met. The adjustment will flow through the income statement
in the subsequent period, as follows:
Income from Change in Estimate الدخل من التغير في تقديرات
Liability for Contingent Consideration 150,000
Income from Change in Estimate 150,000

42. NOTE: if the contingent consideration took the form of issuing stock instead of cash, it would be classified as paid –in – capital from contingent consideration.

43. Illustration: P Company acquired all the net assets of S Company in exchange for P Company’s common stock. P Company also agreed to issue additional shares of common stock to the former stockholders of S Company if the average post-combination earnings over the next two years equalled or exceeded $800,000. Assume that the contingency is expected to be met, and goodwill was recorded in the original acquisition transaction. Based on the information available at the acquisition date, the additional 10,000 shares (par value of $1 per share) expected to be issued are valued at $150,000. To complete the recording of the acquisition, P Company will make the following entry:
Goodwill 150,000
Paid-in-Capital for Contingent Consideration 150,000

44. Illustration: Assuming that the target is met, but the stock price has increased from $15 per share to $18 per share at the time of issuance, P Company will not adjust the original
amount recorded as equity. Thus, P Company will make the following entry
Paid-in-Capital for Contingent Consideration 150,000
Common Stock ($1 par) 10,000
Paid-in-Capital in Excess of Par 140,000

45. Adjustments During the Measurement Period
SFAS No. 141R [ASC 805–10–25] defines the measurement period as the period after the initial acquisition date during which the acquirer may adjust the provisional amounts recognized at the acquisition date.
The measurement period ends as soon as the acquirer has the needed information about facts and circumstances, not to exceed one year from the acquisition date. فترة القياس تنتهي حالما الشركة الدامجة تمتلك المعلومات اللازمة عن الحقائق والظروف
provisional amounts المبالغ المؤقتة

46. Contingency Based on Outcome of a Lawsuit
Consideration contingently issuable may depend on both
future earnings and
future security prices.
In such cases, an additional cost of the acquired company should be recorded for all additional consideration contingent on future events, based on the best available information and estimates at the acquisition date (as adjusted by the end of the measurement period).

47. Contingent Consideration in an Acquisition
Review Question
Which of the following statements best describes the current authoritative position with regard to accounting for contingent consideration?
If contingent consideration depends on both future earnings and future security prices, an additional cost of the acquired company should be recorded only for the portion of consideration dependent on future earnings.
The measurement period for adjusting provisional amounts always ends at the year-end of the period in which the acquisition occurred.
A contingency based on security prices has no effect on the determination of cost to the acquiring company.
The purpose of the measurement period is to provide a reasonable time to obtain the information necessary to identify and measure the fair value of the acquiree’s assets and liabilities, as well as the fair value of the consideration transferred.

48. Leveraged Buyouts
A leveraged buyout (LBO) occurs when a group of employees (generally a management group) and third-party investors create a new company to acquire all the outstanding common shares of their employer company.
The management group contributes the stock they hold to the new corporation and borrows sufficient funds to acquire the remainder of the common stock.
The old corporation is merged into the new corporation.
Leveraged buyout (LBO) transactions are to be viewed as business combinations.
LO 8 Leverage buyouts.

49. IFRS Versus U.S. GAAP The project on business combinations
Was the first of several joint projects undertaken by the FASB and the IASB.
Complete convergence has not yet occurred.
International standards currently allow a choice between
writing all assets, including goodwill, up fully (100% including the noncontrolling share), as required now under U.S. GAAP, or
continuing to write goodwill up only to the extent of the parent’s percentage of ownership.
LO 10 Differences between U.S. GAAP and IFRS .

50. IFRS Versus U.S. GAAP Other differences and similarities:
LO 10 Differences between U.S. GAAP and IFRS .

51. IFRS Versus U.S. GAAP Other differences and similarities:
LO 10 Differences between U.S. GAAP and IFRS .

52. IFRS Versus U.S. GAAP Other differences and similarities:
LO 10 Differences between U.S. GAAP and IFRS .

53. IFRS Versus U.S. GAAP Other differences and similarities:
LO 10 Differences between U.S. GAAP and IFRS .

54. IFRS Versus U.S. GAAP Other differences and similarities:
LO 10 Differences between U.S. GAAP and IFRS .

55. Deferred Taxes in Business Combinations
APPENDIX A
الدافع الرئيس للشركة المندمجة في اي عملية اتحاد هو تحقيق صفقة ومكاسب بحيث لا تدفع هذه الشركة اي ضرائب على هذه المكاسب.
To the extent that the seller accepts common stock rather than cash or debt in exchange for the assets, the sellers may not have to pay taxes until a later date when the shares accepted are sold.
When the acquirer has inherited the book values of the assets for tax purposes but has recorded market values for reporting purposes, a deferred tax liability needs to be recognized.

56. Deferred Taxes in Business Combinations
Illustration: Taxaware Company has net assets totaling $700,000 (market value), including fixed assets with a market value of $200,000 and a book value of $140,000. The book values of all other assets approximate market values. Taxaware Company is acquired by Blinko in a combination that qualifies as a nontaxable exchange for Taxaware shareholders. Blinko issues common stock valued at $800,000 (par value $150,000). First, if we disregard tax effects, the entry to record the acquisition would be:
Assets 700,000
Goodwill 100,000
Common Stock 150,000
Additional Contributed Capital 650,000

57. Deferred Taxes in Business Combinations
Illustration: Now consider tax effects, assuming a 30% tax rate. First, the excess of market value over book value of the fixed assets creates a deferred tax liability because the excess depreciation is not tax deductible. Thus, the deferred tax liability associated with the fixed assets equals 30% × $60,000 (the difference between market and book values), or $18,000. The inclusion of deferred taxes would increase goodwill by $18,000 to a total of $118,000. The entry to include goodwill is as follow:
Assets 700,000
Goodwill 118,000
Deferred Tax Liability 18,000
Common Stock 150,000
Additional Contributed Capital 650,000

58. Copyright
Copyright © 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

61. Required 1: prepare the Journal entry on the book of Petrello Company
Price paid= shares × $48 = $1200,000
F.V of identifiable net assets = (200, , , ,000 – 320,000) = $1,080,000
Goodwill = 1,200,000 – 1,080,000 = $120,000
 Entries on Petrello Company’s books would be:
Cash
200,000
Receivables
240,000
Inventory
Plant and Equipment
720,000
Goodwill
120,000
Liabilities
320,000
Common Stock (25,000  $16)
400,000
Other Contributed Capital ($48 - $16)  25,000
800,000

62. Required 2: preparing the balance sheet.
Balance sheet for Petrello Company after the merger:
Cash
$680,000
Receivables
720,000
Inventories
2,240,000
Plant and Equipment (net) ($3,840,000 + $720,000)
4,560,000
Goodwill
120,000
Total Assets
$8,320,000
Liabilities
1,520,000
Common Stock, $16 par ($3,440,000 + (25000 ×$16))
3,840,000
Other Contributed Capital ($400,000 + (48-16)× 25000)
1,200,000
Retained Earnings
1,760,000
Total Equities

63. Exercise 2-3

64. Price paid = ((30000×$25)+ (15000×$100)+ $50,000) = $2,300,000
F.V of net assets = (198, , , ,144,000 – 275,000 – 495,000) = $1,452,000
Goodwill = $848,000
The Journal Entry
Accounts Receivable (11, ,000)
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 (B.V)
450,000
Premium on Bonds Payable ($495,000 - $450,000)
45,000
Preferred Stock (15,000 × $100)
1,500,000
Common Stock (30,000 × $10)
300,000
Other Contributed Capital ($25 - $10) × 30,000
Cash
50,000

66. F.V of identifiable net assets = (960,000+1,440,000-216,000)
Answer 2-5
Price paid = $2,160,000
F.V of identifiable net assets = (960,000+1,440, ,000)
= $2,184,000
Gain on Acquisition = $24,000
Current Assets
960,000
Plant and Equipment
1,440,000
Liabilities
216,000
Cash
2,160,000
Gain on acquisition
( recording the acquisition)
24000
Goodwill
360,000
Liability for Contingent Consideration
360,000  
(To complete the recording of the acquisition)

68. Exercise 2-6
The amount of the contingency is $500,000 (10,000 shares at $50 per share)
Part A
Goodwill
500,000
Paid-in-Capital for Contingent Consideration
Part B
Common Stock ($10 par)
100,000
Paid-In-Capital in Excess of Par
400,000

69. Exercise 2-7

70. Problem 2-1

71. Price paid = 20,000 shares × $15 = $ 300,000
F.V of identifiable net assets = (85, ,000 – 35,000)
= $200,000
Goodwill = $100,000
Current Assets
85,000
Plant and Equipment
150,000
Goodwill
100,000
Liabilities
35,000
Common Stock [(20,000 shares , $10/share)]
200,000
Other Contributed Capital [(20,000 ×($15 – $10))]
Acquisition Costs Expense
20,000
Cash
Other Contributed Capital
6,000

73. Price paid = $720,000 F. V of identifiable net assets = (1,064,000-83, ,000) = $801,000 Gain on acquisition = 801, ,000 Gain on acquisition = $ 81,000

74. Problem 2-4 Part A: Accounts Receivable 72,000 Inventory 99,000 Land
Inventory
99,000
Land
162,000
Buildings
450,000
Equipment
288,000
Allowance for Uncollectible Accounts
7,000
Accounts Payable
83,000
Note Payable
180,000
Cash
720,000
Gain on acquisition
81,000
Goodwill
135,000
Liability for Contingent Consideration

76. Liability for Contingent Consideration 135,000
Problem 2-4
Part B:
Liability for Contingent Consideration
135,000
Cash
Part C:
Liability for Contingent Consideration
135,000
Income from Change in Estimate

77. Problem 2-2

78. Part A.
Price paid = ((140+40) × $50) = $9,000
Fair value of net assets acquired:
Fair value of assets of Baltic and Colt $10,300
Less liabilities assumed
F. V of net assets
Goodwill $1,160
The Balance sheet of Acme:
Assets (except goodwill) ($3,900 + $9,000 + $1,300) $14,200
Goodwill ,160
Total Assets $15,360
Liabilities ($2,030 + $2,200 + $260) $4,490
Common Stock (180 × $20) + $2, ,600
Other Contributed Capital (180 × ($50 – $20)) ,400
Retained Earnings (130)
Total Liabilities and Equity $15,360

79. Part B.
Baltic
2011: Step1: Fair value of the reporting unit $6,500,000
Carrying value of unit:
Carrying value of identifiable net assets ,340,000
Carrying value of goodwill ,000*
Total carrying value ,540,000
*[(140,000 x $50) – ($9,000,000 – $2,200,000)]
The excess of carrying value over fair value means that step 2 is required.
Step 2: Fair value of the reporting unit $6,500,000
Fair value of identifiable net assets ,350,000
Implied value of goodwill ,000
Recorded value of goodwill ,000
Impairment loss $ 50,000
(because $150,000 < $200,000)

80. Colt
2011: Step1: Fair value of the reporting unit $1,900,000
Carrying value of unit:
Carrying value of identifiable net assets $1,200,000
Carrying value of goodwill ,000*
Total carrying value ,160,000
*[(40,000 x $50) – ($1,300,000 – $260,000)]
The excess of carrying value over fair value means that step 2 is required.
Step 2: Fair value of the reporting unit $1,900,000
Fair value of identifiable net assets ,000,000
Implied value of goodwill ,000
Recorded value of goodwill ,000
Impairment loss $ 60,000
(because $900,000 < $960,000)