CHAPTER 3
SOLUTIONS TO EXERCISES AND PROBLEMS
EXERCISES
E3.1
Combination and Consolidation
a.
Investment in Simon
30,000,000
Common stock
Additional paid-in capital
300,000
29,700,000
b.
(E)
Common stock
Additional paid-in capital
Retained earnings
3,000,000
7,000,000
4,000,000
Investment in Simon
(R)
Goodwill
14,000,000
16,000,000
Investment in Simon
c.
Total assets
Goodwill
Total assets
Solutions Manual, Chapter 3
16,000,000
$120,000,000 Total liabilities
16,000,000 Common stock
Additional paid-in capital
___________ Retained earnings
$136,000,000 Total liabilities and equity
$ 26,000,000
10,300,000
69,700,000
30,000,000
$136,000,000
©Cambridge Business Publishers, 2010
41
E3.2
Eliminating Entries—Various Cases
In each case, Pluto acquires 100,000 shares of Saturn (=$200,000/$2).
Entry (E):
(amounts in thousands)
Case a
200
1,300
350
150
Common stock
Additional paid-in capital
Retained earnings
AOCI
Treasury stock
Investment in S
Case b
200
1,300
350
150
100
1,900
Case c
200
1,300
350
150
100
1,900
100
1,900
Entry (R):
(amounts in thousands)
Case a
-600
Investment in S
Goodwill
Investment in S
Gain on acquisition
E3.3
Case b
--600
--
Case c
300
----
Simple Consolidation, Previously Unreported Intangibles
(E)
Stockholders’ equity–Senyo
6,000,000
Investment in Senyo
(R)
Land
Intangibles–in-process R&D
Goodwill
6,000,000
500,000
1,000,000
2,500,000
Investment in Senyo
©Cambridge Business Publishers, 2010
42
4,000,000
Advanced Accounting, 1st Edition
-300
E3.4
Eliminating Entries, Acquisition Expenses
(E)
Capital stock
Retained earnings
400,000
1,600,000
Investment in Small
2,000,000
(R)
Inventories
Plant assets, net
Identifiable intangible assets
Goodwill
40,000
200,000
500,000
360,000
Long-term debt
100,000
Investment in Small
1,000,000
Note: Acquisition costs are expensed separately on Giant’s books and do not affect
consolidation eliminating entries.
E3.5
Acquisition and Eliminating Entries—Bargain Purchase
(amounts in millions)
a.
P’s acquisition entry:
Investment in Sherman
Merger expenses
2,980
40
Cash
Gain on acquisition
2,790
230
Calculation of gain on acquisition:
Fair value of S = $2,500 + $100 + $100 + $250 + $30 = $2,980
$2,980 – $2,750 = $230 gain
b.
Consolidation working paper elimination entries:
(E)
Stockholders’ equity–
Sherman
Investment in Sherman
(R)
Inventories
Land
Other plant assets, net
Long-term debt
2,500
2,500
100
100
250
30
Investment in Sherman
480
Note: Acquisition costs are expensed separately and do not affect consolidation eliminating
entries.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2010
43
E3.6
Interpreting Eliminating Entries
a.
The stockholders’ equity (book value) of Seaboard is $48,000,000, based on the first eliminating
entry.
b.
The acquisition cost is $88,000,000, so the excess paid over book value is $40,000,000.
c.
Acquisition cost
Book value
Excess of acquisition cost over book value
Fair value less book value:
Noncurrent assets (overvalued)
Goodwill
$88,000,000
48,000,000
40,000,000
(2,000,000)
$42,000,000
d.
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Totals
Fair value
$ 26,000,000
95,000,000
(20,000,000)
(55,000,000)
$ 46,000,000
Book value less fair value
-2,000,000
---
Book value
$ 26,000,000
97,000,000
(20,000,000)
(55,000,000)
$ 48,000,000
E3.7
Acquisition Entry and Consolidation Working Paper
a.
Bates makes the following entry to record the acquisition (amounts in millions):
Investment in Wilkens
1,900
Cash
Common stock
Additional paid-in capital
300
200
1,400
This entry is reflected in Bates’ account balances in the consolidation working paper below.
©Cambridge Business Publishers, 2010
44
Advanced Accounting, 1st Edition
b.
Consolidation Working Paper (in millions)
Accounts Taken From
Books
Eliminations
Current assets
Plant and equipment, net
Investment in Wilkens
Bates
$
700
3,500
1,900
Wilkens
$ 200
700
--
Dr
(R) 50
(R) 550
Brand names and
trademarks
Goodwill
Total assets
-______
$ 6,100
-______
$ 900
(R) 200
(R) 650
$
$
Current liabilities
Long-term liabilities
Common stock, par value
Additional paid-in capital
Retained earnings
Total liabilities and equity
E3.8
$
500
2,000
500
2,000
1,100
6,100
$
150
300
100
50
300
900
Consolidated
Balances
$ 950
4,750
450 (E)
-1,450 (R)
Cr
200
650
$ 6,550
$
(E) 100
(E) 50
(E) 300
$ 1,900
_______
$ 1,900
650
2,300
500
2,000
1,100
$ 6,550
Identifying and Analyzing Variable Interest Entities
a.
The equity interests are traditional variable interests. However, because minority shareholder C
guarantees 92% of A’s debt, which is most of A’s capital, and will absorb 92% of A=s expected
losses by protecting the subordinated debtholders, A is a VIE. Even if a single investor owns the
other 70% of the equity, and obtains 70% of the expected residual returns, C will absorb a
majority of A’s expected losses and will likely be designated as A’s primary beneficiary. One
could also note that because A’s equity is less than 10% of its total assets (.08 = 1 - .92) a
presumption exists that A is a VIE.
b.
Without any other information, D is the sole owner of B and should consolidate B under SFAS
94. Although contractual and other arrangements could suggest that B is a VIE, the problem is
silent on these matters.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2010
45
c.
The 15% equity could be enough to avoid identifying A as a VIE, if that amount of equity is
deemed adequate to absorb A’s expected losses. If the 15% equity is not adequate, by agreeing to
compensate E for any of A=s losses, C is providing the subordinated financial support that
qualifies as a variable interest, makes A into a VIE, and is likely A’s primary beneficiary. As an
example, if A reports income that exceeds 10% of its average equity, the excess is distributed to
C. A’s shareholders could view this as a kind of insurance payment for being protected from
losses, and would report it as an expense. Suppose A earns $18 on average equity of $100. Of
this, $8 (= $18 – 10% x $100) is C=s share, accounted for as follows:
Dr.
Expense
Cr.
8
Payable to C
8
A therefore reports final net income of $10 (= $18 - $8).
d.
The facts indicate that D is the likely primary beneficiary of variable interest entity B. B’s 10%
stockholders= equity is insulated from losses by the guarantees provided by C and D, indicating
that B is a VIE. Even though B leases far more property to C than to D, losses in guaranteed
residual values on D’s specialized property seem much more likely because of the active
aftermarket for property leased by C. Moreover, D’s unsecured loan to B provides additional
subordinated financial support.
E3.9
Reconstructing Eliminating Entries and Book Value
a.
Consolidated total assets
Less: Cove’s current assets
Less: Cove’s noncurrent assets
Fair value of Bay’s total assets
Less: Goodwill
Fair value of Bay’s identifiable assets
$ 13,000,000
(5,200,000)
(3,800,000)
$ 4,000,000
(340,000)
$ 3,660,000
Acquisition cost
Less: Goodwill
Fair value of Bay’s identifiable net assets
$ 1,600,000
(340,000)
$ 1,260,000
Fair value of Bay’s identifiable assets (from a. above)
Less: Fair value of Bay’s identifiable net assets
Fair value of Bay’s liabilities
$ 3,660,000
(1,260,000)
$ 2,400,000
Fair value of Bay’s identifiable net assets (from b. above)
Less: Fair value of previously unreported intangibles
Book value of Bay’s net assets
$ 1,260,000
(800,000)
$ 460,000
b.
c.
©Cambridge Business Publishers, 2010
46
Advanced Accounting, 1st Edition
d.
(E)
Stockholders’ equity–Bay
460,000
Investment in S
(R)
Identifiable intangibles
Goodwill
460,000
800,000
340,000
Investment in S
1,140,000
E3.10 Identification of Variable Interest Entity and Primary Beneficiary
a.
The answer to this question depends on the ability of the equity interest to absorb
Startek’s potential losses. FIN46(R) specifies that if the equity interest is less than 10
percent of total assets, the entity is a VIE unless there is evidence to the contrary.
However, in this case, the equity interest is 13 percent of assets (=
$4,000,000/$30,000,000). An analysis of expected gains and losses is as follows (in
millions):
Expected Present
Expected Investment Residual Expected Expected
cash flow
value Prob.
PV
fair value
returns
gains
losses
$ 11
$ 10 0.40
$ 4
$ 30
$ (20)
$ (8)
33
30 0.20
6
30
-55
50 0.40
20
30
20
$ 8
_____
$ 30
$ 8
$ (8)
The equity interest of $4,000,000 is insufficient to absorb expected losses of $8,000,000,
so Startek would likely be identified as a VIE.
b.
Because Softek guarantees Startek’s debt, it is the primary beneficiary that will
consolidate Startek.
E3.11 Acquisition and Eliminating Entries
a.
No—goodwill of $2.2 billion is currently present, so it is unlikely that any revaluations
will result in a bargain purchase.
b.
Investment in Energy Brands
4.1
Cash
Put and call liability
Solutions Manual, Chapter 3
2.9
1.2
©Cambridge Business Publishers, 2010
47
c.
(E)
Stockholders’ equity–Energy Brands
1.4
Investment in Energy Brands
(R)
Trademarks ($2.8 – $1.6)
Customer relationships
Goodwill
1.4
1.2
0.2
2.2
Deferred tax liabilities
Investment in Energy Brands
0.9
2.7
E3.12 Consolidation Policy: U.S. GAAP and IFRS
a.
Randolph owns 64% of the voting rights [.64 = (.8 x .60) + (.4 x .40)], and meets the majority
ownership test for consolidation of SFAS 94.
b.
IFRS also recognizes the legal control signified by ownership of 64% of the voting rights and
consolidation would occur.
c.
Randolph’s ownership of the Class A shares produces 48% ( = .8 x .60) of the voting interest.
U.S. GAAP emphasizes majority ownership of the voting stock, so consolidation is unlikely.
IFRS looks at decision making power. The other investor owns 40% of the voting rights. Thus
Randolph does not control the voting rights and decision-making authority appears to be shared.
However, the influence of the other 12% of the Class A shares voting rights must be examined.
If Randolph can demonstrate sufficient influence over that other 12% to dominate Marshall’s
governing board, effective control may exist, requiring consolidation under IFRS, but it seems
unlikely without additional information. In sum, the available evidence points away from
consolidation.
d.
Now Randolph owns 42% ( = .7 x .60) of the voting interest and all other interests are dispersed.
These facts suggest that Randolph can dominate Marshall’s governing board thereby possessing
unshared decision-making power and consolidation would be required under IFRS. Randolph
does not have majority ownership, and consolidation under U.S. GAAP is unlikely.
©Cambridge Business Publishers, 2010
48
Advanced Accounting, 1st Edition
PROBLEMS
P3.1
Working Paper Eliminating Entries, Goodwill
(amounts in millions)
a.
Acquisition cost
Book value
Excess of acquisition cost over book value
Fair value less book value:
Fixed assets, net
Liabilities
Customer lists
Brand names
Goodwill
$ 100
(19)
$ 81
$
b.
(E)
Common stock
Additional paid-in capital
Retained earnings
5
(1)
25
30
59
$ 22
3
9
14
Accumulated other comprehensive income
Treasury stock
Investment in Abba, Inc.
(R)
Fixed assets, net
Customer lists
Brand names
Goodwill
5
25
30
22
Liabilities
Investment in Abba, Inc.
Solutions Manual, Chapter 3
5
2
19
1
81
©Cambridge Business Publishers, 2010
49
P3.2
Consolidated Balance Sheet Working Paper, Identifiable Intangibles, Goodwill
a. (in millions)
Investment in GOC
Merger expenses
112
5
Common stock
2
Additional paid-in capital (1)
55
Contingent consideration liability
2
Cash
58
(1)
APIC = fair value of shares issued – par value of shares issued – registration fees: $55 =
$60 – $2 - $3
b.
Consolidation Working Paper (in millions)
Accounts Taken From
Books
Current assets
Property, plant and
equipment, net
Investment in GOC
ITI
$
142
500
GOC
$
10
130
Eliminations
Dr
(R) 5
112
Identifiable intangible
assets
40 (E)
72 (R)
1,300
20
Goodwill
Total assets
______
$ 2,054
______
$ 160
Current liabilities
Long-term liabilities
Common stock, par
Additional paid-in capital
Retained earnings
Accumulated other
comprehensive income
Treasury stock
Total liabilities and equity
$
$
$
©Cambridge Business Publishers, 2010
50
150
1,202
22
605
95
(15)
(5)
2,054
Consolidated
Cr
Balances
$ 157
60 (R)
570
$
(R) 10
(R) 5
(R) 25
(R) 90
20
100
4
60
(25)
3
(E) 4
(E) 60
(2)
160
_____
$ 202
-1,360
90
$ 2,177
$
3 (R)
25 (E)
(E) 3
2 (E)
$ 202
170
1,305
22
605
95
(15)
(5)
$ 2,177
Advanced Accounting, 1st Edition
P3.3
Stock Acquisition and Consolidation Working Paper Eliminating Entries
(amounts in millions)
a.
Investment in Pharmacia (1)
Merger expenses
(1)
55,873
101
Common stock
Additional paid-in capital
Cash
$55,873 = 1,817 x $30.75
b.
Acquisition cost
Pharmacia book value
Excess of acquisition cost over book value
Excess of fair value over book value:
Inventory
Long-term investments
Property, plant and equipment
In-process R&D
Developed technology rights
Long-term debt
Other assets
Goodwill
91
55,782
101
$55,873
(7,236)
$48,637
$
c.
(E)
Stockholders’ equity—Pharmacia
2,939
40
(317)
5,052
37,066
(1,841)
(15,606)
27,333
$21,304
7,236
Investment in Pharmacia
(R)
Inventory
Long-term investments
In-process R&D
Developed technology rights
Goodwill
2,939
40
5,052
37,066
21,304
Property, plant and
equipment
Long-term debt
Other assets
Investment in Pharmacia
Solutions Manual, Chapter 3
7,236
317
1,841
15,606
48,637
©Cambridge Business Publishers, 2010
51
P3.4
Consolidated Balance Sheet, Bargain Purchase
( amounts in millions)
a.
Calculation of gain on acquisition:
Acquisition cost
Book value
Excess of acquisition cost over book value
Excess of fair value over book value:
Inventory
Marketable securities
Land
Buildings and equipment, net
Long-term debt
Gain on acquisition
$ 1,800
(1,295)
$ 505
$ 100
(50)
245
300
110
$
705
200
b.
Consolidation Working Paper (in millions)
Accounts Taken From
Books
Cash and receivables
Inventory
Marketable securities
Investment in Saxon
Paxon
$ 1,060
1,700
-2,000
Saxon
$ 720
900
300
Land
Buildings and equipment, net
Accumulated depreciation
Total assets
650
3,400
(1,000)
$ 7,810
175
600
-$ 2,695
Current liabilities
Long-term debt
Common stock, par value
Additional paid-in capital
Retained earnings
Total liabilities and equity
$ 1,500
2,000
500
1,200
2,610
$ 7,810
$ 1,000
400
100
350
845
$ 2,695
©Cambridge Business Publishers, 2010
52
Eliminations
Dr
(R) 100
(R) 245
(R) 300
(R) 110
(E) 100
(E) 350
(E) 845
$ 2,050
Consolidated
Balances
$ 1,780
2,700
50 (R)
250
1,295 (E)
-705 (R)
1,070
4,300
(1,000)
$ 9,100
Cr
______
$ 2,050
$ 2,500
2,290
500
1,200
2,610
$ 9,100
Advanced Accounting, 1st Edition
P3.5
Consolidated Balance Sheet Working Paper, Previously Reported Goodwill
( amounts in thousands)
a.
Investment in Stagnant
Merger expenses
8,000
35
Common stock
Additional paid-in capital
Cash
b.
Acquisition cost
Stagnant’s book value
Excess of acquisition cost over book value
Excess of fair value over book value:
Cash and receivables
Marketable securities (1)
Inventory
Plant assets, net
Copyrights
Goodwill (2)
Noncurrent liabilities
Goodwill
(1)
(2)
100
7,700
235
$ 8,000
(4,000)
$ 4,000
$ (200)
400
200
(600)
1,800
(500)
300
1,400
$ 2,600
Although proper accounting for held-to-maturity debt securities is amortized cost, they
are nonetheless adjusted to fair value, as that represents their cost to Placid.
All pre-existing goodwill is eliminated, even though it may be deemed to have a non-zero
fair value.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2010
53
c.
Consolidation Working Paper (in thousands)
Accounts Taken From
Books
Eliminations
Placid
$ 7,765
-7,000
8,000
Stagnant
$ 2,000
600
2,400
Plant assets, net
Copyrights
Goodwill
Total assets
10,000
1,000
-$ 33,765
3,600
200
500
$ 9,300
Current liabilities
Noncurrent liabilities
Common stock, par
Additional paid-in capital
Retained earnings
Total liabilities and equity
$ 6,000
4,000
200
8,600
14,965
$ 33,765
$ 2,000
3,300
100
400
3,500
$ 9,300
Cash and receivables
Marketable securities
Inventory
Investment in Stagnant
P3.6
Dr
Consolidated
Balances
$ 9,565
1,000
9,600
4,000 (E)
-4,000 (R)
600 (R)
13,000
3,000
500 (R)
2,600
$ 38,765
Cr
200 (R)
(R) 400
(R) 200
(R) 1,800
(R) 2,600
(R) 300
(E) 100
(E) 400
(E) 3,500
$ 5,300
$
_____
5,300
$ 8,000
7,000
200
8,600
14,965
$ 38,765
Consolidated Balances, Different Acquirers
The consolidated working paper for Microtech’s acquisition of Webnet Solutions is as
follows:
Consolidation Working Paper (in millions)
Accounts Taken From
Eliminations
a.
Books
Current assets
Property, plant and equipment, net
Investment in Webnet
Patents
Goodwill
Total assets
Current liabilities
Long-term debt
Common stock, par
Additional paid-in capital
Retained earnings
Total liabilities and equity
©Cambridge Business Publishers, 2010
54
Microtech
$ 10
50
200
5
-$ 265
$
4
20
3
224
14
$ 265
Webnet
Solutions
$ 10
50
Dr
Cr
41 (E)
159 (R)
$
$
$
5
-65
4
20
2
25
14
65
Consol.
Balances
$
20
100
--
(R) 159
$
$
(E)
2
(E) 25
(E) 14
$
200
$
_____
200
$
10
159
289
8
40
3
224
14
289
Advanced Accounting, 1st Edition
b.
The consolidated working paper for Webnet Solutions’ acquisition of Microtech is as
follows:
Consolidation Working Paper (in millions)
Accounts Taken From
Books
Current assets
Property, plant and equipment, net
Investment in Microtech
Patents
Developed technology
Client relationships
Goodwill
Total assets
Current liabilities
Long-term debt
Common stock, par
Additional paid-in capital
Retained earnings
Total liabilities and equity
Webnet
Solutions Microtech
$ 10
$ 10
50
50
200
5
5
-$ 265
$
-65
$
$
4
20
3
224
14
$ 265
$
Eliminations
Dr
(R) 20
(R) 10
(R) 100
(R) 29
4
20
2 (E)
2
25 (E) 25
14 (E) 14
65 $
200
Consolidated
Cr
Balances
$
20
120
41 (E)
-159 (R)
20
100
29
-$ 289
$
_____
$ 200
$
8
40
3
224
14
289
c.
Both sets of consolidated balances report the same total assets and the same individual liabilities
and equities. However, the individual asset accounts differ. The acquirer’s assets are not
revalued to fair value, nor are previously unreported assets recognized. Microtech has
understated property, plant and equipment and patents, as well as unreported identifiable
intangible assets. Webnet Solutions’ assets and liabilities are fairly reported, and there are no
identifiable intangibles. When Microtech is the acquirer, the difference between Webnet
Solutions’ acquisition price and reported book value is reported as goodwill, and the difference
between book and fair value of Microtech’s assets is not recognized. When Webnet Solutions is
the acquirer, its goodwill is not recognized, but Microtech’s property, patents, and identifiable
intangibles are reported.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2010
55
Does management want the $159 million purchase premium to be reported as the unspecified
and possibly unproductive asset goodwill, or distributed among several potentially productive
identifiable assets ($20 million to property, plant and equipment; $10 million to patents; $100
million to developed technology; $29 million to client relationships)? If Webnet Solutions is the
acquirer, Microtech’s previously unreported assets will come to light. To the extent that the
existence of identifiable intangibles such as developed technology and client relationships
indicate favorable future earnings potential, investors may view the new disclosures as a positive
signal, increasing stock price. If Microtech is the acquirer, no identifiable intangibles are
recognized, and investors may wonder if Webnet Solutions will sustain its value in the future, as
these assets would seem to be the lifeblood of a technology company.
Management will also consider the implications for future income. Identifiable assets usually
have limited lives and are depreciated or amortized over time, reducing earnings on a regular
basis. Goodwill is tested for impairment loss, and may never be written off. If Microtech is the
acquirer, future reported income may be higher because there are no identifiable intangibles to be
amortized.
Note to instructor: This contrived problem illustrates the games companies can play to choose
between different financial statement effects portraying the same transaction economics.
P3.7
Tangible and Intangible Asset Revaluations
(in millions)
a.
Price
Previously
unrecorded
intangibles
acquired:
Goodwill
IPR&D
Other
identifiable
intangibles
Fair value of
tangible net
assets
acquired
Symbol
Technologies
$3,528
$2,300
95
Good
Technology
$ 438
$301
--
1,000 (3,395)
$ 133
©Cambridge Business Publishers, 2010
56
158
Netopia
$ 183
$122
--
(459)
$ (21)
100
Terayon
$ 137
$102
--
(222)
$ (39)
52
(154)
$ (17)
Advanced Accounting, 1st Edition
b.
The fair values of the tangible liabilities of Good Technology, Netopia, and Terayon are greater
than the fair values of their assets, and since net book values are positive, the fair values of net
tangible assets must be less than related book values. Since book values of liabilities are
generally close to fair value, the cause is likely to be a decline in the value of tangible assets. For
technology companies, tangible assets such as equipment are likely to lose resale value quickly.
Motorola lists identifiable intangibles acquired as completed technology, patents, customerrelated assets, licensed technology and other intangibles. Value is derived almost exclusively
from the future earnings potential of these intangible assets.
c.
(E)
Stockholders’
equity
Symbol Tech
100
Investment in
acquiree
(R)
Goodwill
IPR&D
Other identifiable
intangibles
Tangible net assets
Investment in
acquiree
Good Tech
30
100
Netopia
Terayon
10
30
15
10
15
2,300
95
301
--
122
--
102
--
1,000
33
158
100
52
3,428
51
49
32
408
173
122
d.
IPR&D reflects the estimated fair value of projects that have not yet resulted in viable products.
Fair value is generally based on the present value of future expected cash flows. Below is an
excerpt from Motorola’s disclosure of Symbol Technologies, Inc. in-process R&D:
At the date of acquisition, 31 projects were in process and are expected to be completed through
2008. The average risk adjusted rate used to value these projects is 15-16%. The allocation of value to
in-process research and development was determined using expected future cash flows discounted at
average risk adjusted rates reflecting both technological and market risk as well as the time value of
money. (Source: Motorola, Inc. annual report, 2007)
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2010
57
P3.8
a.
Working Backwards—Eliminating Entries, Preparing Subsidiary’s Balance Sheet
(E)
Stockholders’ equity–Scientific
9,000,000
Investment in Scientific
(R)
Current assets
Plant assets
Identifiable intangibles
Goodwill
9,000,000
500,000
1,200,000
2,000,000
2,300,000
Investment in Scientific
6,000,000
b.
Current assets (1)
Plant assets, net (2)
Total assets
Scientific Company
Balance Sheet, December 31, 2010
$ 3,200,000 Liabilities (3)
13,800,000 Stockholders’ equity
$ 17,000,000 Total liabilities and equity
(1)
(2)
(3)
$3,200,000 = $8,700,000 - $500,000 - $5,000,000
$13,800,000 = $40,000,000 - $1,200,000 - $25,000,000
$8,000,000 = $27,000,000 - $19,000,000
P3.9
Merger and Stock Acquisition, Merger-Related Costs
$
8,000,000
9,000,000
$ 17,000,000
(all amounts in thousands)
a.
Fair value of net assets acquired
Value of consideration given:
46,700,000 shares x $75.25
Stock options
Total consideration given
Apparent amount of merger-related costs capitalized
©Cambridge Business Publishers, 2010
58
$3,556,500
$3,514,175
4,000
$3,518,175
$ 38,325
Advanced Accounting, 1st Edition
b.
(entry on books of MCBC)
Current assets
Property, plant and equipment
Other assets
Identifiable intangibles
Goodwill
486,700
1,011,600
489,600
3,734,900
1,837,600
Current liabilities
Noncurrent liabilities
Capital stock
Stock options
Cash (merger-related costs)
688,300
3,315,600
3,514,175
4,000
38,325
c.
Book value of Molson’s stockholders’ equity = net assets carried at fair value = $486,700 +
1,011,600 + 489,600 – 688,300 – 3,315,600 = $(2,016,000).
(consolidated balance sheet working paper):
(E)
Investment in Molson, Inc.
2,016,000
Stockholders’ equity–
Molson, Inc.
(R)
Intangible assets
Goodwill
2,016,000
3,734,900
1,837,600
Investment in Molson, Inc.
5,572,500
This solution assumes Molson did not previously report recognized intangible assets. If
intangible assets already had a substantial book value, a positive stockholders’ equity could
result.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2010
59
d.
If SFAS 141R had been in effect when this merger occurred, the $38,325 of merger-related costs
would have been expensed and not capitalized. Goodwill would therefore have been smaller by
$38,325, or $1,799,275. The entries would be as follows:
Requirement b.
(entry on books of MCBC)
Current assets
Property, plant and equipment
Other assets
Identifiable intangibles
Goodwill
Merger-related expenses
486,700
1,011,600
489,600
3,734,900
1,799,275
38,325
Current liabilities
Noncurrent liabilities
Capital stock
Stock options
Cash (merger-related costs)
Requirement c.
688,300
3,315,600
3,514,175
4,000
38,325
(consolidated balance sheet working paper)
(E)
Investment in Molson, Inc.
2,016,000
Stockholders’ equity—
Molson, Inc.
(R)
Intangible assets
Goodwill
2,016,000
3,734,900
1,799,275
Investment in Molson, Inc.
5,534,175
Note: Because merger-related costs are not capitalized under SFAS 141R, the Investment
account balance on the books of MCBC is $38,325 lower.
©Cambridge Business Publishers, 2010
60
Advanced Accounting, 1st Edition
P3.10 Consolidation of Variable Interest Entities
(dollar amounts in thousands)
a.
MCBC owns about 50% of each of these joint ventures, close to the over 50% needed for
traditional consolidation; its 52% interest in BRI suggests consolidation. It reports guarantees of
debt issued by BTI and RMMC but it is not clear how significant this is. All of these ventures
appear to be captive or near-captive entities largely designed to serve MCBC’s needs in beer
production and distribution. The ventures’ profits directly benefit MCBC and the other owners.
RMMC and RMBC are nontaxable entities and Grolsch is a taxable entity in the U.K., not the
U.S. Grolsch’s profits are limited by agreement. These conditions point toward VIE status and
there are likely other agreements not disclosed that point toward MCBC being the primary
beneficiary of all four ventures.
b.
At the end of 2007, total assets of the four VIEs sum to $580,341; half is $290,171, a little over
2% of MCBC’s $13,451,566 of total assets, with and without the $290,171. Half of the $38,356
in pre-tax income of the ventures (credited to cost of goods sold) is $19,178, about 4% of
MCBC’s 2007 net income of $497,192. Neither of these are highly significant percentages of
MCBC; the ventures’ liabilities (unknown) are not likely large enough to have much of an effect
on MCBC’s leverage ratios.
c.
Considering that MCBC’s purchases from the ventures affect its cost of goods sold, offsetting
ventures’ “profits” against COGS to reduce the cost reported there seems reasonable.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2010
61
P3.11 Identifiable Intangibles and Goodwill
a.
Prince makes the following entry to record the acquisition on its own books (in thousands):
Investment in Squire
Merger expenses
35,000
1,200
Capital stock
Cash
34,400
1,800
The account balances for Prince, shown in the working paper below, reflect the above entry.
Merger expenses reduce retained earnings, a component of stockholders’ equity.
Consolidation Working Paper (in thousands)
Accounts Taken From
Books
Cash
Accounts receivable
Parts inventory
Vehicle inventory
Equipment, net
Investment in Squire
Prince
$ 1,000
6,000
-15,000
40,000
35,000
Intangible: Lease
Intangible: Service contracts
Intangible: Trade name
Goodwill
Total assets
Current liabilities
Noncurrent liabilities
Stockholders’ equity
©Cambridge Business Publishers, 2010
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Squire
$
300
2,700
5,200
-17,600
--
-$ 97,000
-$ 25,800
$ 5,000
25,000
67,000
$ 97,000
$ 3,100
8,600
14,100
$ 25,800
Eliminations
Dr
(R)
Consolidated
Balances
$ 1,300
100 (R)
8,600
6,000
15,000
59,500
14,100 (E)
-20,900(R)
1,250
2,000
200
14,250
$ 108,100
Cr
800
(R) 1,900
(R) 1,250
(R) 2,000
(R) 200
(R)14,250
$
(R) 600
(E)14,100
$ 35,100
_______
$ 35,100
8,100
33,000
67,000
$ 108,100
Advanced Accounting, 1st Edition
b.
If Prince records the acquisition as a statutory merger, Prince makes the following entry (in
thousands):
Cash
Accounts receivable
Parts inventory
Equipment, net
Intangible: Lease
Intangible: Service contracts
Intangible: Trade name
Goodwill
Merger expenses
300
2,600
6,000
19,500
1,250
2,000
200
14,250
1,200
Cash
Current liabilities
Long-term liabilities
Capital stock
1,800
3,100
8,000
34,400
When the above entry is reflected in Prince’s account balances, Prince’s balance sheet is
identical to that shown in the consolidated working paper for a stock acquisition.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2010
63
P3.12 Consolidation Policy: U.S. GAAP and IFRS
Subcase
(1)
(2)
(3)
(4)
(5)
(6)
U.S. GAAP
Do not consolidate
Do not consolidate
Do not consolidate
Do not consolidate
Do not consolidate
Do not consolidate
IFRS
Consolidate
Consolidate
Consolidate
Possibly consolidate
Possibly consolidate
Possibly consolidate
Under SFAS 94, consolidation is not appropriate, as no case has majority ownership. Under
IFRS, the following considerations apply.
In cases (1), (2) and (3),
1.
2.
Andrews owns a large minority interest (40 to 49 percent) and the remaining
ownership is widely dispersed (no single party holds more than 3 percent).
A recent election has shown that Andrews is able to cast a majority of votes cast
(53 to 58 percent).
Absent evidence to the contrary, either one of these is sufficient to presume that Andrews has
effective control, and that consolidated statements should be prepared.
In cases (4), (5) and (6), the conclusion is less clear. While Andrews owns a fairly large
minority interest (25 to 35 percent) and other ownership is widely dispersed, it would be a matter
of judgment as to whether Andrews' interest is large enough. Andrews was able to nominate its
director candidates, solicit some proxies, and convince other stockholders to vote for its
nominees in order to obtain a majority of the votes. While a conclusion of effective control
seems highly likely here, it is not automatic. Further, case (4) is stronger than case (5), which in
turn is stronger than case (6).
©Cambridge Business Publishers, 2010
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Advanced Accounting, 1st Edition