Chapter 1 Questions

1)What are the legal distinctions between a business combination, a merger, and a
consolidation?

A business combination is a broad term encompassing various transactions where two or

more businesses come together, including mergers, consolidations, acquisitions, and joint
ventures.

A merger is a legal transaction where two or more companies combine into one existing
entity, with one company surviving and the other(s) ceasing to exist.

Consolidation is a legal process where two or more companies combine to form an

entirely new entity, with the original companies ceasing to exist.

Now the legal distinctions between them is:

2) Why is the pooling of interest method eliminated while accounting for a business
combination?

a) Lack of Transparency

b) Comparability Issues

c) Potential for Abuse

d) Aligning with International Standards

APIC= (Fair value- Par (Book) Value) *# of shares = ($40-$20) *1,000,000 = $20,000,000

-(200,000+50,000+100,000+20,000+30,000) = 19,600,000

Required: Calculate Goodwill/Bragin from Purchase

Goodwill = Investment cost – fair value of Net Assets = 50,000-

(12,000+15,000+32,000+40,000-15,000-25,000) = (9,000) Bragin from purchase, and for
reminder this account has a credit normal balance + it goes to the Income statement
which goes to the Retained Earnings (Equity) and not the assets like the goodwill!
Total liabilities to be recognized by Van = Total fair value of the liabilities (if not equal to
Book Value) = +2,500+400+7,000+10,000 = 20,000

We didn’t include interest payable since the book value and fair value are equal

Kind of confuses me personally

Goodwill= 11,000 -(2,000+600+3,000+1,000+6,800+10,100+3,000-1,500-4,600-7,100) =
(2,300) Bragin from purchase

1)Investment Payment Transaction

Dr. Investment in Sung 11,000,000

Cr. Share Capital – Ordinary 5,000,000

Cr. APIC 5,000,000

Cr. Cash 1,000,000

2)No additional expenses therefore no entry

3) Transfer of assets and liabilities

Dr. Cash 2,000

Dr. Trade Receivables 600

Dr. Inventories 3,000

Dr. Prepaid expenses 1,000

Dr. Land 6,800

Dr. Building - Net 10,100

Dr. Equipment - Net 3,000

Cr. Bragin from purchase 2,300

Cr. Investment in Sung 11,000

Cr. Trade Payable1,500

Cr. Notes Payable 4,600

Cr. Bonds Payable7,100

Goodwill = 10,000- (1,000+12,000+13,000-4,000-13,000) =1,000 (Goodwill)

Consolidated Balance Sheet (Amounts in Thousands)

Cash 3,000
Other current Assets 25,000
Plant assets 28,000
Goodwill 1,000
Total assets 57,000

Current liabilities 9,000

Other liabilities 25,000
Common stock, $10 par 12,000
APIC 8,000
Retained earnings 3,000
Total L and E 57,000
 1)Excess Allocation Schedule
Inventories 20,000
Land 20,000
Buildings 30,000
Equipment 25,000
Other liabilities 30,000
Goodwill -0-
Total Excess 125,000
2)Consolidated Balance Sheet
Cash 90
Receivables 80
Inventories 230
Land 100
Building 250
Equipment 175
Total Assets 925

Account Payable 130

Other liabilities 145
Common stock 450
APIC 100
Retained Earnings 100
Total L and E 925
Chapter 2:

Goodwill = 29,000,000 – 25%(100,000,000-4,000,000+24,000,000-8,000,000)= 1,000,000

Goodwill

Dr. Investment in Lumpia 240 (30%*800)

Cr. Income from lumpia 240

Equity after transaction = 4,000,0000+1,400,000 = 5,400,000 , after issuing an additional
10,000 shares, the total shares now is 40,000 (the 30,000 was from 3,000,000/100),
therefore the % of FV of net assets = 5,400,000*(10,000/40,000) = 1,350,000, therefore
goodwill is 1,400,000-1,350,000 = 50,000 which is B

Investment in Sun on Dec 31, 2019, = 2,400,000-40,000-20,000 = 2,340,000

Goodwill = 3,500,000 – 30%(12,000,000) =(100,000) Bragin from Purchase

Income from William = 1,000,000*30% = 300,000 (Credit OfCourse)

Income from Sun = -125*0.25-25*0.25+(600-400) *0.25=12.5

Investment in Sun = 300-125*0.25-25*0.25+(600-400) *0.25=312.5

12,000/(24,000+12,000) = 33.3%

Dr. Investment in Sun 250,000

Cr. Cash 250,000

Dr. Invesment in Sun 40,000

Cr. Income from Sun 40,000

Dr. Cash30,000

Cr. Investment in Sun 30,000

Dr. Income from Sun 2,000

Cr. Investment in Sun 2,000

1)Dr. Investment in Son 780,000

Cr. Cash 780,000

Dr. Investment in Son 180,000

Cr. Income from Son 180,000

Dr. Cash 120,000

Cr. Investment in Son 120,000

Dr. Investment in Son 60,000

Cr. Income from Son 60,000

2)= 780,000+180,000-120,000+60,000=900,000

3)

Sales 4,000,000
Expenses (2,800,000)
 Operating Income 1,200,000
Income from Son 240,000 (180+60)
Net Income 1,440,000
Not sure about part 3 !!!!!

Income from Sun=108,000*40% = 43,200

Investment in Sun = 290,000+43,200-48,000*40%=314,000

Implied Goodwill=Total Fair Value of Subsidiary−Fair Value of Net Assets.

Implied Goodwill=640,000−500,000=140,000

Change in value = 140,000-200,000 = 60,000 impairment Loss

Goodwill = 600,000-40%*1,000,000=200,000
Income from Sachi = 200,000*40%=80,000

Investment in Sachi = 600,000+80,000-30,000*4*40%=632,000

2016: 10%

Dr. Investment in Sheon 200,000

Cr. Cash200,000

March 1 and September 1:Dividends

Dr. Cash 2,500 x2

Cr. Investment in Sheaon 2,500 x2

Net Income:

Dr. Investment in sheon 10,000

Cr. Income in Sheon 10,000

2017: 10+70=80%

Dr. Investment in Sheon 1,000,000

Cr. Cash 1,000,000

March 1 and September 1: Dividends

Dr. Cash 20,000 x2

Cr. Investment in Sheaon 20,000 x2

Net Income

Dr. Investment in sheaon 120,000

Cr. Income in sheaon 120,000

Goodwill= 800,000- 40% (2,250,000+20,000-40,000+80,000) = (124,000)????

Excess Allocation Schedule 40%

Inventory 8,000
Equipment (4,000)
Notes Payable 4,000
Goodwill (Bargin) ?
Excess ?
Not sure about (1)

2)Dr. Investment in Akash 800,000

Cr. Cash 800,000

Dr. Cash 64,000

Cr. Investment in Akash 64,000

Dr. Investment in Akash 160,000

Cr. Income in Akash 160,000

Dr. Income from Akash 8,000

Cr. Investment in Akash 8,000

Dr. Investment in Akash 4,000

Cr. Income from Akash 4,000

Dr. Income from Akash 4,000

Cr. Investment in akash 4,000

Investemnt in akash = 800,000-64,000+160,000-8,000+4,000-4,000=888,888

Depreciation = 120/3 Years = $40

NCI’s share from Income = ($800-$40) * 10% = $76

Consolidated Net Income = ($2,520+$800) -$40 –$76 = $3,204

NCI = 261/90% * 10% =29

Consolidated Income Statement

Sales $4,200
Less: Cost of Goods sold $2,240
Gross Profit $1,960
Operating Expenses $1,070
Consolidated Income $890
Attributable to...
NCI share in income $(29)
Parent owners share in income $861
Excess = 350- 70% (220) = 196; 196/70%=280

Goodwill = 350 - 70% (560-240) = 126; 126/70%=180

NCI = 350/70% * 30% = 150

 1) Allocation Scheule 100%
Inventories 40
Land 20
Buildings - Net 40
Equipment - Net (20)
Other Liabilities 20
Goodwill 180
Excess 280

2)Consolidated Financial Statements

Account Name Value

Cash $110
Receivables - Net $220
Inventories $240
Land $320
Buildings - Net $400
Equipment - Net $220
Investment in Son $-0-
Goodwill $180
Total Assets $1,690

Accounts Payable $340

Other liabilities $100
Capital Stock, $20 par $1,000
Retained earnings $100
NCI $150
Total Equities and Liabilities $1,690
Excess = Cost - % (BV of Net Assets) = 8,100- 90% (7,200) =1,620

Goodwill = Cost - % (FV of Net Assets) = 8,100 – 90% (13,500-4,900) = 360

Excess Allocation Schedule (90%) 100 %

Inventories 360 400
Land 900 1,000
Building– Net (270) (300)
Equipment - Net 90 100
Notes payable (180) (200)
Bonds Payable 360 400
Goodwill 360 400
Excess 1,620 1,800
No NCI since we paid for 100% of the company

Something is wrong with my answer!

Account Name Amount

Cash 174
Receivables - Net 550
Inventories 1,750
Land 800
Equipment - Net 2,980
Investment in Petite $-0-
Total Assets 6,254
 Accounts Payable 620
Common stock 4,000
Retained Earnings 1,634 (1,590+44)
Total Liabilities and Equity 6,254

NCI = 2,320/ 80% *20%= 580

Account Name Amount

Cash $380
Accounts Receivable $600
Equipment - Net $1,800
Building - Net $3,000
Land $3,000
Investment in David PLC $-0-
Total Assets $8,780
Accounts Payable 480
Dividends Payable 140
Notes Payable 1,400
Capital Stock 2,000
Retained Earnings 4,180
NCI 580
Total L and E 8,780

1) 1,360/80% * 20% = 340

2) 816+300 = 1,116
3) 160 (800-480-120=200*80%)
4) 2,000
5) 1,360
6) 1,120-80% (400+800) =160
7) 2,400-1,480-320-40 (160*20%)= 560
8) 808
9) 808+560-240=1,128
10) 340
Consolidated Balance Sheet @ Dec 31, 2016

Goodwill = 4,000-80% (3,000+150+240) =1,288/80%=1,610

Account Name Balance

Cash $160
Receivables - Net $500
Dividend Receivable $40
Inventories $3,350
Land $1,350
Equipment - Net $3,080
Investment in Jeeves 0
Goodwill $1,610
Total Assets $10,090

Accounts Payable 230

Dividend Payable 0
Common Stock 5,000
Retained Earnings 3,852
NCI 1,008
Total Liabilities and Equity 10,090
1) Investment cost - % of FV of Net Assets = Goodwill

Investment Cost = 480+ 80% (1,600+,160) = 1,888

2) Total Equity on 2020 = 3,200+240+496= 3,936

3)Investment in sun account on 2020 = 496/20%*80%=1,984

4)capital stock = 3,200 and Retained Earnings = 240

NCI = 2,884/70% * 30% = 1,236

Excess = 2,800-70% (2,000+1,200) =560/70%=800

Goodwill = 2,800-70% (3,200+80+320) =280/70%=400

Account Name Amount
Cash 320
Accounts Receivable - Customers 2,560
Accounts Receivable from Pop 0
Dividend Receivable 28
Inventories 3,280
Land 1,000
Plants Assests - Net 4,480
Investment in Son 0
Goodwill 400
Total Assets 12,068

Account Payable - Suppliers 1,520

Accounts Payable – To son 0
Dividend Payable 200
Long- term debt 2,800
Capital Stock 4,000
Retained earnings 2,312
NCI 1,236
Total L and E 12,086
Goodwill = Investment Cost - %FV of Net Assets = 3,600,000-90% (5,000,000-200,000-
500,000+400,000-750,000+200,000) = (135,000) ; Gain from Bragin Purchase;
135,000/90%= (150,000)

Note that we don’t include the inventory and land in the income and Equipment

Income = 1,000,000-100,000+150,000-50,000=1,000,000*90% = 900,000

Investment in Subsidiary = 4,000,000+1,000,000-300,000 (Dividends each march and

June)-100,000+150,000-50,000=4,700*90%=4,230

NCI = 4,230/90%*10% = 470

Consolidated Retained Earnings Statement

Beginning RE Balance $720

Net Income $267.2
Dividends $(200)
Ending RE Balance $787.2
Consolidated Income Statement

Sales 2,000
Cost of sales (1,200)
Gross Profit 800
Other expenses (514.4)
Consolidated Income 185.6
Attributable to ... (18.4)
NCI share in income
Parent owners share in Income 267.2

Consolidated Balance Sheet

Account Amount
Cash 272
Accounts receivable - Net 424
Inventories 420
Land 380
Buildings - Net 1,000
Equipment - Net 720
Investment in Sun 0
Patent 201.6
Total Assets 3,417.6

Accounts Payable 380

Dividends Payable 8 (32-24)
Capital stock, 2,000
Retained Earnings 787.2
NCI 242.4
Total L and E 3,417.6
Consolidated RE statement
 Beginning RE 720
Net Income 284
Dividends (200)
Ending RE 804

Consolidated Income Statement

Sales 2,000
Cost of Sales 1,200
Gross Profit 800
Other expenses 492
Consolidated Income 308
Attributable to... 24
NCI share in income
Parent owners share in income 284

Consolidated Balance Sheet

Cash 296
A/R - net 400
Dividends Receivable from son 0 (intercompany)
Inventories 420
Note receivable from Pop 0 (Intercompany)
Land 380
Buildings- Net 1,000
Equipment - Net 720
Investment in Son 0
Goodwill 224 (3440-3216(majmoo3 El asserts b4
goodwill))
Total Assets 3,440

Accounts Payable 380

Note Payable to Son 0 (Intercompany)
Dividend Payable 8 (32-24)
Capital Stock 2,000
Retained Earnings 804
NCI 248
Total L and E 3,440
Sales – COGS (Inventory) = gross profit – operating expenses (Patent) - Depreciation
(Building and equipment) = consolidated Income- attributable to... NCI share in income
=parent share in income

If it’s undervalued asset = add the amount itself to the cost and vice versa