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Test Bank for Advanced Financial Accounting 11th Edition By Theodore Christensen
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Advanced Financial Accounting 11th Edition Christensen Solutions Manual Test BankAdvanced Financial Accounting 11th Edition Christensen
Solutions Manual Test Bank.
Solutions Manual, Answers, Instructors Manual are included
CHAPTER 1
INTERCORPORATE ACQUISITIONS AND INVESTMENTS IN OTHER ENTITIES
ANSWERS TO QUESTIONS
Q1-1 Complex organizational structures often result when companies do business in a complex
business environment. New subsidiaries or other entities may be formed for purposes such as
extending operations into foreign countries, seeking to protect existing assets from risks
associated with entry into new product lines, separating activities that fall under regulatory
controls, and reducing taxes by separating certain types of operations.
Q1-2 The split-off and spin-off result in the same reduction of reported assets and liabilities.
Only the stockholders’ equity accounts of the company are different. The number of shares
outstanding remains unchanged in the case of a spin-off and retained earnings or paid-in capital
is reduced. Shares of the parent are exchanged for shares of the subsidiary in a split-off,
thereby reducing the outstanding shares of the parent company.
Q1-3 The management of Enron appears to have used special-purpose entities to avoid
reporting debt on its balance sheet and to create fictional transactions that resulted in reported
income. It also transferred bad loans and investments to special-purpose entities to avoid
recognizing losses in its income statement.
Q1-4 (a) A statutory merger occurs when one company acquires another company and the
assets and liabilities of the acquired company are transferred to the acquiring company; the
acquired company is liquidated, and only the acquiring company remains.
(b) A statutory consolidation occurs when a new company is formed to acquire the assets
and liabilities of two combining companies. The combining companies dissolve, and the new
company is the only surviving entity.
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,Advanced Financial Accounting 11th Edition Christensen Solutions Manual Test Bank
(c) A stock acquisition occurs when one company acquires a majority of the common stock of
another company and the acquired company is not liquidated; both companies remain as
separate but related corporations.
Q1-5 A noncontrolling interest exists when the acquiring company gains control but does not
own all the shares of the acquired company. The non-controlling interest is made up of the
shares not owned by the acquiring company.
Q1-6 Goodwill is the excess of the sum of (1) the fair value given by the acquiring company, (2)
the fair value of any shares already owned by the parent and (3) the acquisition-date fair value
of any noncontrolling interest over the acquisition-date fair value of the net identifiable assets
acquired in the business combination.
Q1-7 The level of ownership acquired does not impact the amount of goodwill reported under
the acquisition method.
Q1-8 The total difference at the acquisition date between the sum of (1) the fair value given by
the acquiring company, (2) the fair value of any shares already owned by the parent and (3) the
acquisition-date fair value of any noncontrolling interest and the book value of the net
identifiable assets acquired is referred to as the differential.
Q1-9 The purchase of a company is viewed in the same way as any other purchase of assets.
The acquired company is owned by the acquiring company only for the portion of the year
subsequent to the combination. Therefore, earnings are accrued only from the date of purchase
forward.
Q1-10 None of the retained earnings of the subsidiary should be carried forward under the
acquisition method. Thus, consolidated retained earnings immediately following an acquisition is
limited to the balance reported by the acquiring company.
Q1-11 Additional paid-in capital reported following a business combination is the amount
previously reported on the acquiring company's books plus the excess of the fair value over the
par or stated value of any shares issued by the acquiring company in completing the acquisition
less any sock issue costs.
Q1-12 When the acquisition method is used, all costs incurred in bringing about the combination
are expensed as incurred. None are capitalized. However, costs associated with the issuance of
stock are recorded as a reduction of additional paid-in capital.
Q1-13 When the acquiring company issues shares of stock to complete a business
combination, the excess of the fair value of the stock issued over its par value is recorded as
additional paid-in capital. All costs incurred by the acquiring company in issuing the securities
should be treated as a reduction in the additional paid-in capital. Items such as audit fees
associated with the registration of the new securities, listing fees, and brokers' commissions
should be treated as reductions of additional paid-in capital when stock is issued.
Q1-14 If the fair value of a reporting unit acquired in a business combination exceeds its
carrying amount, the goodwill of that reporting unit is considered unimpaired. On the other hand,
if the carrying amount of the reporting unit exceeds its fair value, impairment of goodwill is
implied. An impairment must be recognized if the carrying amount of the goodwill assigned to
the reporting unit is greater than the implied value of the carrying unit’s goodwill. The implied
value of the reporting unit’s goodwill is determined as the excess of the fair value of the
reporting unit over the fair value of its net identifiable assets.
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,Advanced Financial Accounting 11th Edition Christensen Solutions Manual Test Bank
Q1-15 When the fair value of the consideration given in a business combination, along with the
fair value of any equity interest in the acquiree already held and the fair value of any
noncontrolling interest in the acquiree, is less than the fair value of the acquiree’s net identifiable
assets, a bargain purchase results.
Q1-16 The acquirer should record the clarification of the acquisition-date fair value of buildings
as a reduction to buildings and addition to goodwill. .
Q1-17 The acquirer must revalue the equity position to its fair value at the acquisition date and
recognize a gain. A total of $250,000 ($25 x 10,000 shares) would be recognized in this case
assuming that the $65 per share price is the appropriate fair value for all shares (i.e. there is
no control premium for the new shares purchased).
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, Advanced Financial Accounting 11th Edition Christensen Solutions Manual Test Bank
SOLUTIONS TO CASES
C1-1 Assignment of Acquisition Costs
MEMO
To: Vice-President of Finance
Troy Company
From: , CPA
Re: Recording Acquisition Costs of Business Combination
Troy Company incurred a variety of costs in acquiring the ownership of Kline Company and
transferring the assets and liabilities of Kline to Troy Company. I was asked to review the
relevant accounting literature and provide my recommendations as to what was the appropriate
treatment of the costs incurred in the acquisition of Kline Company.
Current accounting standards require that acquired companies be valued under ASC 805 at the
fair value of the consideration given in the exchange, plus the fair value of any shares of the
acquiree already held by the acquirer, plus the fair value of any noncontrolling interest in the
acquiree at the combination date [ASC 805]. All other acquisition-related costs directly traceable
to an acquisition should be accounted for as expenses in the period incurred [ASC 805]. The
costs incurred in issuing common or preferred stock in a business combination are required to
be treated as a reduction of the recorded amount of the securities (which would be a reduction
to additonal paid-in capital if the stock has a par value or a reduction to common stock for no
par stock).
A total of $720,000 was paid in completing the Kline acquisition. The $200,000 finders’ fee and
$90,000 legal fees for transferring Kline’s assets and liabilities to Troy should be recorded by
Kline as acquisition expense in 20X7. The $60,000 payment for stock registration and audit fees
should be recorded as a reduction of paid-in capital recorded when the Troy Company shares
are issued to acquire the shares of Kline. The only cost potentially at issue is the $370,000 legal
fees resulting from the litigation by the shareholders of Kline. If this cost is considered to be a
direct acquisition cost, it should be included in acquisition expense. If, on the other hand, it is
considered to be related to the issuance of the shares, it should be debited to paid-in capital.
Primary citation
ASC 805
C1-2 Evaluation of Merger
Page numbers refer to the page in the 3M 2005 10-K report.
a. The CUNO acquisition improved 3M’s product mix by adding a comprehensive line of filtration
products for the separation, clarification and purification of fluids and gases (p. 4).
The CUNO acquisition added 5.1 percent to Industrial sales growth (p.13), and was the primary
reason for a 1.0 percent increase in total sales in 2005 (p. 15).
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