Acco 450

Chapter 1 assignment


Answers to Questions

1 A business combination is a union of business entities in which two or more previously separate and independent companies are brought under the control of a single management team. FASB Statement No. 141 describes three situations that establish the control necessary for a business combination, namely, when one or more corporations becomesubsidiaries, when one company transfers its net assets to another, and when each combining company transfers its net assets to a newly formed corporation.

2 The dissolution of all but one of the separate legal entities is not necessary for a business combination. An example of one form of business combination in which the separate legal entities are not dissolved is when one corporation becomes asubsidiary of another. In the case of a parent-subsidiary relationship, each combining company continues to exist as a separate legal entity even though both companies are under the control of a single management team.

3 A business combination occurs when two or more previously separate and independent companies are brought under the control of a single management team. Merger and consolidationin a generic sense are frequently used as synonyms for the term business combination. In a technical sense, however, a merger is a type of business combination in which all but one of the combining entities are dissolved and a consolidation is a type of business combination in which a new corporation is formed to take over the assets of two or more previously separate companies and all of thecombining companies are dissolved.

4 Goodwill arises in a business combination accounted for under the purchase method when the cost of the investment (price paid plus direct costs) exceeds the fair value of identifiable net assets acquired. Under FASB Statement No. 142, goodwill is no longer amortized for financial reporting purposes and will have no effect on net income, unless the goodwill isdeemed to be impaired. If goodwill is impaired, a loss will be reocnized.

5 Negative goodwill is the opposite of goodwill. It results from a purchase business combination in which the fair value of identifiable net assets acquired exceeds the investment cost. Any negative goodwill must be applied to a proportionate reduction of noncurrent assets other than marketable securities. If negativegoodwill is greater than the fair value of all noncurrent assets acquired other than marketable securities, the excess is written off as an extraordinary loss on the income statement under FASB Statement No. 141.

SOLUTIONS TO EXERCISES

Solution E1-1

1 A
2 B
3 A
4 C
5 D


Solution E1-2 [AICPA adapted]

1 D
Plant and equipment should be recorded at $45,000, the $55,000 fairvalue less the $10,000 excess fair value of net assets acquired over investment cost.

2 C
| |Investment cost | |$800,000 |
| | | | |
| |Less: Fair value of net assets| | |
| | Cash |$ 80,000 | |
| | Inventory | 190,000 | |
| | Property and equipment — net | 560,000 ||
| | Liabilities |(180,000) | 650,000 |
| |Goodwill | |$150,000 |



















Solution E1-3

Stockholders’ equity — Pillow Corporation on January 3

|Capital stock, $10 par,...