Advanced_Accounting_11e_Solution_Manual AND TESTBANK

UNDERSTANDING THE ISSUES 1. (a) Product extension—manufacturer ex-pands product lines in boating industry. (b) Vertical forward—manufacturer buys distribution outlets (c) Conglomerate—unrelated businesses (d) Vertical backward—manufacturer ac-quires a supplier (e) Vertical forward—an entertainment company acquires outlets for its products (f) Market extension—companies provid-ing the same services expand their geographic market 2. By accepting cash in exchange for the net assets of the company, the seller would have to recognize an immediate taxable gain. However, if the seller were to accept common stock of another corporation instead, the seller could construct the transaction as a tax-free reorganization. The seller could then account for the transaction as a tax-free exchange. The seller would not pay taxes until the shares received were sold. 3. Identifiable assets (fair value).. $600,000 Deferred tax liability ($200,000 × 40%).................. (80,000) Net assets................................ $520,000 Goodwill Price paid................................. $850,000 Net assets................................ (520,000) Goodwill ................................... $330,000 4. (a) The net assets and goodwill will be re-corded at their full fair value on the books of the parent on the date of acquisition. (b) An investment account is recorded at the price paid for the interest. 5. Puncho will record the net assets at their fair value of $800,000 on its books. Also, Puncho will record goodwill of $100,000 ($900,000 – $800,000) resulting from the excess of the price paid over the fair value. Semos will record the removal of its net assets at their book values. Semos will record a gain on the sale of business of $500,000 ($900,000 – $400,000). 6. (a) Value Analysis: Price paid ............................... $800,000 Fair value of net assets.......... 520,000 Goodwill.................................. $280,000 Current assets (fair value)...... $120,000 Land (fair value) ..................... 80,000 Building and equipment (fair value)............................ 400,000 Customer list (fair value) ........ 20,000 Liabilities (fair value) .............. (100,000) Goodwill.................................. 280,000 Total ....................................... $800,000 (b) Value Analysis: Price paid ............................... $450,000 Fair value of net assets.......... 520,000 Gain........................................ $ (70,000) Current assets (fair value)...... $120,000 Land (fair value) ..................... 80,000 Building and equipment (fair value)............................ 400,000 Customer list (fair value) ........ 20,000 Liabilities (fair value) .............. (100,000) Gain........................................ (70,000) Total ....................................... $450,000 7. The 2011 financial statements would be revised as they are included in the 2012–2011 comparative statements. The 2012 statements would be based on the new values. The adjustments would be: (a) The equipment and building will be re-stated at $180,000 and $550,000 on the comparative 2011 and 2012 balance sheets. (b) Originally, depreciation on the equip-ment is $40,000 ($200,000/5) per year. It will be recalculated as $36,000 ($180,000/5) per year. The adjustment for 2011 is for a half year. 2011 depreciation expense and accumulated depreciation will be restated at $18,000 instead of $20,000 for the half year. Depreciation expense for 2012 will be $36,000. (c) Originally, depreciation on the building is $25,000 ($500,000/20) per year. It will be recalculated as $27,500 ($550,000/20) per year. The adjustment for 2011 is for a half year. 2011 depreciation expense and accumulated depreciation will be restated at $13,750 instead of $12,500 for the half year. Depreciation expense for 2012 will be $27,500. (d) Goodwill is reduced $30,000 on the comparative 2011 and 2012 balance sheets. 8. Fair value of operating unit ...... $1,200,000 Book value including goodwill.. 1,250,000 Goodwill is impaired. Fair value of operating unit ...... $1,200,000 Fair value of net identifiable assets (excluding goodwill) ... 1,120,000 Recalculated goodwill.............. $ 80,000 Existing goodwill ...................... 200,000 Goodwill impairment loss......... $ 120,000 9. (a) An estimated liability should have been recorded on the purchase date. Any difference between that estimate and the $100,000 paid would be recorded as a gain or loss on the liability already recorded. (b) Even though the issuance is based on performance and suggests additional goodwill, no adjustment is made if additional stock is issued. In this case, the paid-in capital in excess of par account is reduced for the par value of the additional shares to be issued. The fair value of the stock originally issued is be ing devalued. The entry would take the following form: Paid-In Capital in Excess of Par............ 10,000 Common Stock ($1 par)............. 10,000 (c) This agreement is also settled by issuing shares. The price is not changed. The paid-in capital in excess of par account is reduced for the par value of the additional shares to be issued. The fair value of the stock originally issued is being devalued. The entry would take the following form: Paid-In Capital in Excess of Par............ 5,000 Common Stock ($1 par) ............ 5,000 10. The two major differences are: (a) Goodwill is $100,000. Under U.S. GAAP it would be impairment tested and possibly reduced in future periods. Under IFRS, it would be amortized over some number of future periods. (b) Under U.S. GAAP, the stock issue costs would reduce the amount credited to paid in capital. Under IFRS, the issue costs would be expensed in the period incurred. EXERCISES EXERCISE 1-1 (1) Current Assets.......................................................................... 100,000 Land.......................................................................................... 90,000 Building..................................................................................... 300,000 Equipment ................................................................................ 275,000 Goodwill.................................................................................... 187,000 Liabilities .............................................................................. 102,000 Cash..................................................................................... 850,000 Expenses (acquisition costs).................................................... 15,000 Cash..................................................................................... 15,000 (2) Cash ......................................................................................... 850,000 Liabilities................................................................................... 100,000 Accumulated Depreciation—Building ....................................... 200,000 Accumulated Depreciation—Equipment................................... 100,000 Current Assets ..................................................................... 80,000 Land ..................................................................................... 50,000 Building ................................................................................ 450,000 Equipment............................................................................ 300,000 Gain on Sale of Business..................................................... Note: Seller does not receive the acquisition costs. 370,000 (3) Investment in Crowley Company.............................................. 850,000 Cash ................................................................................... 850,000 Expenses (acquisition costs).................................................... 15,000 Cash ................................................................................... 15,000 Note: At year-end, Crowley would be consolidated with Barton, as explained in Chapter 2. EXERCISE 1-2 Cash................................................................................................. 100,000 Inventory.......................................................................................... 250,000 Equipment........................................................................................ 220,000 Land................................................................................................. 180,000 Buildings .......................................................................................... 300,000 Goodwill*.......................................................................................... 640,000 Discount on Bonds Payable............................................................. 140,000