Chapter 1Solution Manual.docx
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Chapter 1Solution Manual.docx
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Chapter1SolutionManual
CHAPTER1
INTERCORPORATEACQUISITIONSANDINVESTMENTSINOTHERENTITIES
ANSWERSTOQUESTIONS
Q1-1 Complexorganizationalstructuresoftenresultwhencompaniesdobusinessinacomplexbusinessenvironment.Newsubsidiariesorotherentitiesmaybeformedforpurposessuchasextendingoperationsintoforeigncountries,seekingtoprotectexistingassetsfromrisksassociatedwithentryintonewproductlines,separatingactivitiesthatfallunderregulatorycontrols,andreducingtaxesbyseparatingcertaintypesofoperations.
Q1-2 Thesplit-offandspin-offresultinthesamereductionofreportedassetsandliabilities.Onlythestockholders’equityaccountsofthecompanyaredifferent.Thenumberofsharesoutstandingremainsunchangedinthecaseofaspin-offandretainedearningsorpaid-incapitalisreduced.Sharesoftheparentareexchangedforsharesofthesubsidiaryinasplit-off,therebyreducingtheoutstandingsharesoftheparentcompany.
Q1-3 ThemanagementofEnronappearstohaveusedspecial-purposeentitiestoavoidreportingdebtonitsbalancesheetandtocreatefictionaltransactionsthatresultedinreportedincome.Italsotransferredbadloansandinvestmentstospecial-purposeentitiestoavoidrecognizinglossesinitsincomestatement.
Q1-4 (a) Astatutorymergeroccurswhenonecompanyacquiresanothercompanyandtheassetsandliabilitiesoftheacquiredcompanyaretransferredtotheacquiringcompany;theacquiredcompanyisliquidated,andonlytheacquiringcompanyremains.
(b) Astatutoryconsolidationoccurswhenanewcompanyisformedtoacquiretheassetsandliabilitiesoftwocombiningcompanies;thecombiningcompaniesdissolve,andthenewcompanyistheonlysurvivingentity.
(c) Astockacquisitionoccurswhenonecompanyacquiresamajorityofthecommonstockofanothercompanyandtheacquiredcompanyisnotliquidated;bothcompaniesremainasseparatebutrelatedcorporations.
Q1-5 Assetsandliabilitiestransferredtoanewwholly-ownedsubsidiarynormallyaretransferredatbookvalue.Intheeventthevalueofanassettransferredtoanewlycreatedentityhasbeenimpairedpriortothetransferanditsfairvalueislessthanthecarryingvalueonthetransferringcompany’sbooks,thetransferringcompanyshouldrecognizeanimpairmentlossandtheassetshouldthenbetransferredtotheentityatthelowervalue.
Q1-6 Theintroductionoftheconceptofbeneficialinterestexpandsthosesituationsinwhichconsolidationisrequired.Existingaccountingstandardshavefocusedonthepresenceorabsenceofequityownership.Consolidationandequitymethodreportinghavebeenrequiredwhenacompanyholdstherequiredlevelofcommonstockofanotherentity.Thebeneficialinterestapproachsaysthatevenwhenacompanydoesnotholdstockofanothercompany,consolidationshouldoccurwheneverithasadirectorindirectabilitytomakedecisionssignificantlyaffectingtheresultsofactivitiesofanentityorwillabsorbamajorityofanentity’sexpectedlossesorreceiveamajorityoftheentity’sexpectedresidualreturns.
Q1-7 Anoncontrollinginterestexistswhentheacquiringcompanygainscontrolbutdoesnotownallthesharesoftheacquiredcompany.Thenon-controllinginterestisthesharesnotownedbytheacquiringcompany.
Q1-8Underpooling-of-interestsaccountingthebookvaluesofthecombiningcompanieswerecarriedforwardandnogoodwillwasrecognized.Futureearningswerenotreducedbyadditionalamortization,depreciation,orwrite-offs.
Q1-9 Goodwillistheexcessofthesumofthefairvaluegivenbytheacquiringcompanyandtheacquisition-datefairvalueofanynoncontrollinginterestovertheacquisition-datefairvalueofthenetidentifiableassetsacquiredinthebusinesscombination.
Q1-10 Thelevelofownershipacquireddoesnotimpacttheamountofgoodwillreportedundertheacquisitionmethod.Priortotheadoptionoftheacquisitionmethodtheamountreportedwasdeterminedbytheamountpaidbytheacquiringcompanytoattainownershipoftheacquiree.
Q1-11 Whenless-than-100-percentownershipisacquired,goodwillmustbeallocatedbetweentheacquirerandthenoncontrollinginterest.Thisisaccomplishedbyassigningtotheacquirerthedifferencebetweentheacquisition-datefairvalueofitsequityinterestintheacquireeanditsshareoftheacquisition-datefairvalueoftheacquiree’snetassets.Theremainingamountofgoodwillisassignedtothenoncontrollinginterest.
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Q1-12 Thetotaldifferenceattheacquisitiondatebetweenthefairvalueoftheconsiderationexchangedandthebookvalueofthenetidentifiableassetsacquiredisreferredtoasthedifferential.
Q1-13 Thepurchaseofacompanyisviewedinthesamewayasanyotherpurchaseofassets.Theacquiredcompanyisownedbytheacquiringcompanyonlyfortheportionoftheyearsubsequenttothecombination.Therefore,earningsareaccruedonlyfromthedateofpurchaseforward.
Q1-14 Noneoftheretainedearningsofthesubsidiaryshouldbecarriedforwardundertheacquisitionmethod.Thus,consolidatedretainedearningsislimitedtothebalancereportedbytheacquiringcompany.
Q1-15 Additionalpaid-incapitalreportedfollowingabusinesscombinationistheamountpreviouslyreportedontheacquiringcompany'sbooksplustheexcessofthefairvalueovertheparorstatedvalueofanysharesissuedbytheacquiringcompanyincompletingtheacquisition.
Q1-16 Whentheacquisitionmethodisused,allcostsincurredinbringingaboutthecombinationareexpensedasincurred.Nonearecapitalized.However,costsassociatedwiththeissuanceofstockarechargedtoadditionalpaid-incapital.
Q1-17 Whentheacquiringcompanyissuessharesofstocktocompleteabusinesscombination,theexcessofthefairvalueofthestockissuedoveritsparvalueisrecordedasadditionalpaid-incapital.Allcostsincurredbytheacquiringcompanyinissuingthesecuritiesshouldbetreatedasareductionintheadditionalpaid-incapital.Itemssuchasauditfeesassociatedwiththeregistrationofsecurities,listingfees,andbrokers'commissionsshouldbetreatedasreductionsofadditionalpaid-incapitalwhenstockisissued.Anadjustmenttobondpremiumorbonddiscountisneededwhenbondsareusedtocompletethepurchase.
Q1-18 Ifthefairvalueofareportingunitacquiredinabusinesscombinationexceedsitscarryingamount,thegoodwillofthatreportingunitisconsideredunimpaired.Ontheotherhand,ifthecarryingamountofthereportingunitexceedsitsfairvalue,impairmentofgoodwillisimplied.Animpairmentmustberecognizedifthecarryingamountofthegoodwillassignedtothereportingunitisgreaterthantheimpliedvalueofthecarryingunit’sgoodwill.Theimpliedvalueofthereportingunit’sgoodwillisdeterminedastheexcessofthefairvalueofthereportingunitoverthefairvalueofitsnetassetsexcludinggoodwill.
Q1-19Whenthefairvalueoftheconsiderationgiveninabusinesscombination,alongwiththefairvalueofanyequityinterestintheacquireealreadyheldandthefairvalueofanynoncontrollinginterestintheacquiree,islessthanthefairvalueoftheacquiree’snetidentifiableassets,abargainpurchaseresults.
Q1-20* Theacquirershouldrecordtheclarificationoftheacquisition-datefairvalueofbuildingsasareductiontobuildingsandadditiontogoodwill.
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Q1-21* Theacquirermustrevaluetheequitypositiontoitsfairvalueattheacquisitiondateandrecognizeagain.Atotalof$250,000($25x10,000shares)wouldberecognizedinthiscase.
Q1-22AThepurchasemethodcallsforrecordingtheacquirer’sinvestmentintheacquiredcompanyattheamountofthetotalpurchasepricepaidbytheacquirer,includingassociatedcosts.Thedifferencebetweenthisamountandtheacquirer’sproportionateshareofthefairvalueofthenetidentifiableassetsisreportedasgoodwill.
Q1-23AUnderthepoolingmethod,thebookvaluesoftheassets,liabilities,andequityoftheacquiredcompanyarecarriedforwardwithoutadjustmenttofairvalue.NogoodwillisrecordedbecausethefairvalueoftheConsiderationgivenisnotrecognized.Consistentwiththeideaoftheownersofthecombiningcompaniescontinuingasownersofthecombinedcompany,theretainedearningsofbothcompaniesarecarriedforward.
SOLUTIONSTOCASES
C1-1ReportingAlternativesandInternationalHarmonization
a.Inthepast,U.S.companieswererequiredtosystematicallyamortizetheamountofgoodwillrecorded,therebyreducingearnings,whilecompaniesinothercountrieswerenotrequiredtodoso.Thus,reportedresultssubsequenttobusinesscombinationswereoftenlowerthanforforeignacquirersthatdidnotamortizegoodwill.TheFASBchangedaccountingforgoodwillin2001tonolongerrequireamortization.Instead,theFASBnowrequiresgoodwilltobetestedperiodicallyforimpairmentandwrittendownifimpaired.Also,internationalaccountingstandardsandU.S.standardshavebecomecloserinrecentyears,andauthoritativebodiesareworkingtobringstandardsevencloser.
b.U.S.companiesmustbeconcernedaboutaccountingstandardsinothercountriesandaboutinternationalstandards(i.e.,thoseissuedbytheInternationalAccountingStandardsCommittee).Companiesoperateinaglobaleconomytoday.Notonlydotheybuyandsellproductsandservicesinothercountries,buttheymayraisecapitalandhaveoperationslocatedinothercountries.Suchcompaniesmayhavetomeetforeignreportingrequirements,andtheserequirementsmaydifferfromU.S.reportingstandards.Inrecentyears,theacceptanceofinternationalaccountingstandardshasbecomewidespread,andinternatio
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