CHAPTER 3
SOLUTIONS TO MULTIPLE CHOICE QUESTIONS, EXERCISES AND PROBLEMS
MULTIPLE CHOICE QUESTIONS
1.
d
The major motivation for off-balance-sheet financing is to avoid the impact on leverage.
2.
b
The fair values of the entity’s assets and liabilities are included with those of the U.S.
company on the consolidated balance sheet. The fair value of the net assets is owned by
outside parties, and is labeled noncontrolling interest.
3.
d
Cash
Present
Expected
Residual Expected Expected
flow
value
Prob
PV
Investment returns
gains
losses
$156,000 $150,000 0.65 $ 97,500
$111,000 $39,000
$25,350
46,800
45,000 0.20
9,000
111,000 (66,000)
$(13,200)
31,200
30,000 0.15
4,500
111,000 (81,000)
_____
(12,150)
Total
$111,000
$25,350 $ 25,350
4.
b
5.
a
The entry on PR’s books is:
Investment in SX
Merger expenses
50,000
200
Cash
Capital stock
6.
10,600
39,600
a
Elimination E is:
Capital stock
Retained earnings
5,000
8,000
Accumulated OCI
Treasury stock
Investment in SX
Solutions Manual, Chapter 3
1,000
9,600
2,400
©Cambridge Business Publishers, 2013
1
7.
c
Elimination R is:
Current assets
Identifiable intangible assets (1)
Long-term debt
Goodwill (2)
(1)
(2)
8.
2,200
15,000
400
34,400
PP&E
4,000
Current liabilities
400
Investment in SX
47,600
$(14,000 – $4,000) + $4,000 + $1,000 = $15,000
$50,000 – ($4,200 + $6,000 + $14,000 + $4,000 + $1,000 - $2,000 - $11,600) =
$34,400
d
See elimination R above.
9.
d
10.
c
IFRS requires consolidation of a less-than-majority-owned equity investment if the
investor controls the investee. If PX owns 40% of SC’s stock, and the other 60% is
spread among small investors, it is likely that PX controls SC. Alternative d is not
correct because PX does not have a majority vote and cannot make decisions unilaterally;
other investors owning 45% of the stock (= 85% shares voted - 40% shares voted by PX)
participate in the decision making process and influence decisions.
©Cambridge Business Publishers, 2013
2
Advanced Accounting, 2nd Edition
EXERCISES
E3.1
Combination and Consolidation
a.
Investment in Sylvan
48,000,000
Common stock
Additional paid-in capital
400,000
47,600,000
b.
(E)
Common stock
Additional paid-in capital
Retained earnings
5,000,000
10,000,000
2,000,000
Investment in Sylvan
(R)
Goodwill
17,000,000
31,000,000
Investment in Sylvan
31,000,000
c.
Other assets
Goodwill
Total assets
Solutions Manual, Chapter 3
$175,000,000 Total liabilities
31,000,000 Common stock
Additional paid-in capital
___________ Retained earnings
$206,000,000 Total liabilities and equity
$ 38,000,000
15,400,000
92,600,000
60,000,000
$206,000,000
©Cambridge Business Publishers, 2013
3
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
500,000
1,000,000
2,500,000
Investment in Senyo
©Cambridge Business Publishers, 2013
4
6,000,000
4,000,000
Advanced Accounting, 2nd Edition
-300
E3.4
Eliminating Entries, Acquisition Expenses
(E)
Capital stock
Retained earnings
200,000
1,800,000
Investment in Stengl
2,000,000
(R)
Long-term debt
Identifiable intangible assets
Goodwill
25,000
1,200,000
7,575,000
Plant assets, net
600,000
Inventories
200,000
Investment in Stengl
8,000,000
Note: Acquisition costs are expensed separately on Pinnacle’s books and do not affect
consolidation eliminating entries.
E3.5
Acquisition and Eliminating Entries—Bargain Purchase
(amounts in millions)
a.
Publix 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 Sherman = $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, 2013
5
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
E3.7
Acquisition Entry and Consolidation Working Paper
a.
Phoenix makes the following entry to record the acquisition (amounts in millions):
Investment in Spark
Merger expenses
2,650
8
Cash
Common stock
Additional paid-in capital
413
250
1,995
This entry is reflected in Phoenix’s account balances in the consolidation working paper
below.
©Cambridge Business Publishers, 2013
6
Advanced Accounting, 2nd Edition
E3.7
continued
b.
Consolidation Working Paper (in millions)
Accounts Taken From
Books
Current assets
Plant and equipment, net
Investment in Spark
Brand names and
trademarks
Goodwill
Total assets
Current liabilities
Long-term liabilities
Common stock, par value
Additional paid-in capital
Retained earnings
Total liabilities and equity
Phoenix
$
587
3,500
Spark
$ 200
700
2,650
--
-______
$ 6,737
-______
$ 900
$
$
$
500
2,000
550
2,595
1,092
6,737
$
150
300
100
50
300
900
Eliminations
Dr
Cr
10 (R)
(R) 200
Consolidated
Balances
$ 777
4,400
450 (E)
2,200 (R)
(R) 300
(R) 1,710
-300
1,710
$ 7,187
$
(E) 100
(E) 50
(E) 300
$ 2,660
_______
$ 2,660
650
2,300
550
2,595
1,092
$ 7,187
E3.8
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. C
has decision-making power through its majority representation on the board. C has the
obligation to absorb A’s significant losses and benefits through its equity interest and
guarantee of A’s bank loans, 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, B is not a VIE. D is the sole owner of B through its
100% equity ownership, and should consolidate B under ASC Topic 810. 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, 2013
7
E3.8
continued
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. In that case, E is the controlling
investor and C does not consolidate A.
If the 15% equity is not adequate, A is a VIE. C has the decision making power, and by
agreeing to compensate E for any of A’s losses, C absorbs significant losses. Therefore
C is likely A’s primary beneficiary and should consolidate A.
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.
B’s stockholders’ equity is only 10% of its total assets, and is insulated from losses by the
guarantees provided by C and D. Moreover, D’s unsecured loan to B provides additional
subordinated financial support. These factors indicate that B is a VIE. D has decision
making power through its control of B’s board. Losses in guaranteed residual values on
D’s specialized property, and its unsecured loan to B, require D to absorb a potentially
significant amount of B’s losses. Therefore it is likely that D is B’s primary beneficiary
and must consolidate B.
©Cambridge Business Publishers, 2013
8
Advanced Accounting, 2nd Edition
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
b.
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
c.
d.
(E)
Stockholders’ equity–Bay
460,000
Investment in S
(R)
Identifiable intangibles
Goodwill
800,000
340,000
Investment in S
Solutions Manual, Chapter 3
460,000
1,140,000
©Cambridge Business Publishers, 2013
9
E3.10 Identification of Variable Interest Entity and Primary Beneficiary
a.
If qualitative factors are inconclusive, the answer to this question depends on a
quantitative analysis of the ability of the equity interest to absorb Startek’s potential
losses. ASC Topic 810 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% of assets (= $4,000,000/$30,000,000). Using the quantitative
analysis presented in the chapter (and illustrated in ASC para. 810-10-55-53), expected
gains and losses are computed 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)
Because the $4,000,000 equity interest is insufficient to absorb the expected losses of
$8,000,000 computed above, the quantitative analysis indicates that Startek is a VIE.
b.
Softek must have (1) the power to direct Startek’s activities that most significantly affect
its economic performance, and (2) be exposed to the losses and benefits that are
potentially significant to Startek. Because Softek guarantees Startek’s debt, it probably
meets requirement (2). However, we don’t have enough information to assess Softek’s
decision making power over Startek.
E3.11 Acquisition and Eliminating Entries: Statutory Merger and Stock Investment
a.
Coca-Cola took control of CCE’s North American business in October, 2010. The
investment is recorded at fair value at the time control changes hands. Coca-Cola “paid”
cash, equity-based compensation, and the 33 percent equity interest for all of CCE’s
North American business. Previously, Coca-Cola used the equity method to account for
its investment. Equity method investments are not carried at fair value.
b.
Share-based compensation related to services performed by CCE employees prior to the
acquisition are included in the acquisition cost, but compensation related to future
services are reported as prepaid expenses and written off to expense in future years. The
compensation related to prior years is part of the cost of acquiring CCE’s North
American business; it is not compensation for services performed for the consolidated
entity.
©Cambridge Business Publishers, 2013
10
Advanced Accounting, 2nd Edition
E3.11 continued
c.
Investment in CCE
4,978
Gain on acquisition
4,978
Current assets
Property, plant and equipment
Bottlers’ franchise rights
Goodwill
Prepaid compensation
2,690
5,385
6,393
7,746
81
Liabilities
Cash
Equity (stock compensation)
Investment in CCE
d.
1.
Investment in CCE
15,366
1,321
235
5,373
4,978
Gain on acquisition
4,978
Investment in CCE
Prepaid compensation
1,475
81
Cash
Equity (stock compensation)
2.
(E)
Stockholders’ equity – CCE
1,321
235
6,634
Investment in CCE
(R)
Current assets
Bottlers’ franchise rights
Goodwill
690
6,393
7,746
Property, plant and
equipment
Investment in CCE
Solutions Manual, Chapter 3
6,634
14,615
214
©Cambridge Business Publishers, 2013
11
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 ASC Topic 810.
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 for control, regardless of equity ownership. 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, 2013
12
Advanced Accounting, 2nd Edition
PROBLEMS
P3.1
Working Paper Eliminating Entries, Goodwill
(amounts in millions)
a.
Acquisition cost
Book value (deficit)
Excess of acquisition cost over book value
Fair value less book value:
Fixed assets, net
Liabilities
Customer lists
Brand names
Goodwill
$ 300
9
$ 309
$ (10)
1
40
60
91
$ 218
b.
(E)
Common stock
Additional paid-in capital
Accumulated other comprehensive
income
Investment in Sherwood, Inc.
5
15
4
9
Retained earnings
Treasury stock
(R)
Customer lists
Brand names
Liabilities
Goodwill
40
60
1
218
Fixed assets, net
Investment in Sherwood, Inc.
Solutions Manual, Chapter 3
30
3
10
309
©Cambridge Business Publishers, 2013
13
P3.2
Consolidated Balance Sheet Working Paper, Identifiable Intangibles, Goodwill
a. (in millions)
Investment in GOC
Merger expenses
112
5
Common stock
Additional paid-in capital (1)
Contingent consideration liability
Cash
(1) APIC = fair value of shares issued – par value of shares issued – registration fees:
$55 = $60 – $2 - $3
2
55
2
58
b.
Consolidation Working Paper (in millions)
Accounts Taken From
Books
Current assets
Property, plant and
equipment, net
Investment in GOC
$
ITI
142
GOC
$
10
500
130
Eliminations
Dr
(R) 5
60 (R)
40 (E)
72 (R)
112
Identifiable intangible assets
Goodwill
Total assets
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, 2013
14
1,300
______
$ 2,054
20
______
$ 160
$
$
$
150
1,202
22
605
95
(15)
(5)
2,054
$
20
100
4
60
(25)
3
(2)
160
Cr
Consolidated
Balances
$ 157
(R) 10
(R) 5
(R) 25
(R) 90
570
--
1,360
90
$ 2,177
$
25 (E)
170
1,305
22
605
95
2 (E)
$ 202
(15)
(5)
$ 2,177
3 (R)
(E) 4
(E) 60
(E) 3
_____
$ 202
Advanced Accounting, 2nd Edition
P3.3
Stock Acquisition and Consolidation Working Paper Eliminating Entries
(amounts in millions)
a.
Investment in Pharmacia (1)
Merger expenses
55,873
101
Common stock
Additional paid-in capital
Cash
91
55,782
101
(1) $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
$55,873
(7,236)
$48,637
$
2,939
40
(317)
5,052
37,066
(1,841)
(15,606)
27,333
$21,304
c.
(E)
Stockholders’ equity—Pharmacia
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, 2013
15
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
Paxon
$ 1,060
1,700
--
Saxon
$ 720
900
300
Land
Buildings and equipment, net
Accumulated depreciation
Total assets
2,000
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
Cash and receivables
Inventory
Marketable securities
Investment in Saxon
©Cambridge Business Publishers, 2013
16
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, 2nd Edition
P3.5
Consolidated Balance Sheet Working Paper, Previously Reported Goodwill
(amounts in thousands)
a.
Investment in Static
Merger expenses
10,000
45
Common stock
Additional paid-in capital
Cash
200
9,450
395
b.
Acquisition cost
Static’s book value
Excess of acquisition cost over book value
Excess of fair value over book value:
Cash and receivables
Inventory
Equity method investments
Plant assets, net
Copyrights
Goodwill (1)
Noncurrent liabilities
Goodwill
$ 10,000
(4,000)
$ 6,000
$ (500)
(1,400)
1,800
(1,100)
4,800
(500)
(200)
2,900
$ 3,100
(1) All pre-existing goodwill is eliminated, even though it may be deemed to have a nonzero fair value.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2013
17
P3.5
continued
c.
Consolidation Working Paper (in thousands)
Accounts Taken From
Books
Cash and receivables
Inventory
Equity method investments
Investment in Static
Progressive
$ 7,605
7,000
--
Static
$ 2,000
2,400
600
Eliminations
Dr
Cr
500 (R)
1,400 (R)
(R) 1,800
4,000 (E)
6,000 (R)
1,100 (R)
Plant assets, net
Copyrights
Goodwill
Total assets
10,000
10,000
1,000
-$ 35,605
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
300
10,350
14,955
$ 35,605
$ 2,000
3,300
200 (R)
100 (E) 100
400 (E) 400
3,500 (E) 3,500
_____
$ 9,300 $ 13,700 $ 13,700
©Cambridge Business Publishers, 2013
18
(R) 4,800
(R) 3,100
500 (R)
Consolidated
Balances
$ 9,105
8,000
2,400
-12,500
6,000
3,100
$ 41,105
$ 8,000
7,500
300
10,350
14,955
$ 41,105
Advanced Accounting, 2nd Edition
P3.6
Consolidated Balances, Different Acquirers
a.
Consolidation Working Paper (in millions)
Accounts Taken From
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
Webnet
Microtech Solutions
$ 10
$ 10
50
50
200
5
-$ 265
$
4
20
3
224
14
$ 265
Eliminations
Dr
Cr
Consol.
Balances
$
20
100
41 (E)
159 (R)
$
$
$
5
-65
4
20
2
25
14
65
(R) 159
$
$
(E)
2
(E) 25
(E) 14
_____
$
200 $ 200
$
-10
159
289
8
40
3
224
14
289
b.
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
Solutions Manual, Chapter 3
Eliminations
Webnet
Solutions Microtech
Dr
$ 10
$ 10
50
50 (R) 20
200
5
5
-$ 265
$
-65
$
$
4
20
3
224
14
$ 265
$
(R) 10
(R) 100
(R) 29
Consol.
Cr
Balances
$
20
120
41 (E)
-159 (R)
20
100
29
-$ 289
4
20
2 (E)
2
25 (E) 25
14 (E) 14
_____
65 $
200 $ 200
$
$
©Cambridge Business Publishers, 2013
19
8
40
3
224
14
289
P3.6
continued
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.
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.
©Cambridge Business Publishers, 2013
20
Advanced Accounting, 2nd Edition
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
b.
Symbol
Technologies
$3,528
$2,300
95
1,000
Good
Technology
$ 438
$301
--
(3,395)
$ 133
158
Netopia
$ 183
$122
--
(459)
$ (21)
100
Terayon
$ 137
$102
--
(222)
$ (39)
52
(154)
$ (17)
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, customer-related assets, licensed technology and other
intangibles. Value is derived almost exclusively from the future earnings potential of
these intangible assets.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2013
21
P3.7
continued
c.
(E)
Stockholders’
equity
Symbol Tech
100
Investment in
acquiree
(R)
Goodwill
IPR&D
Other identifiable
intangibles
Tangible net assets
Investment in
acquiree
d.
Good Tech
30
100
Netopia
Terayon
10
30
15
10
2,300
95
301
--
122
--
102
--
1,000
33
158
100
52
3,428
51
49
32
408
173
122
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. inprocess 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)
©Cambridge Business Publishers, 2013
22
15
Advanced Accounting, 2nd Edition
P3.8
Working Backwards—Eliminating Entries, Preparing Subsidiary’s Balance Sheet
a.
(E)
Stockholders’ equity–Sonara
5,000,000
Investment in Sonara
(R)
Plant assets
Identifiable intangibles
Goodwill
5,000,000
600,000
4,500,000
15,900,000
Current assets
Investment in Sonara
1,000,000
20,000,000
b.
Sonara Company
Balance Sheet, December 31, 2013
Current assets (1)
$ 2,000,000 Liabilities (3)
Plant assets, net (2)
9,400,000 Stockholders’ equity
Total assets
$ 11,400,000 Total liabilities and equity
(1)
(2)
(3)
$
6,400,000
5,000,000
$ 11,400,000
$2,000,000 = $6,000,000 + $1,000,000 - $5,000,000
$9,400,000 = $35,000,000 - $600,000 - $25,000,000
$6,400,000 = $30,400,000 - $24,000,000
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2013
23
P3.9
Merger and Stock Acquisition, Merger-Related Costs
(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
b.
$3,556,500
$3,514,175
4,000
$3,518,175
$ 38,325
(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)
c.
688,300
3,315,600
3,514,175
4,000
38,325
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.
2,016,000
(R)
Intangible assets
Goodwill
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.
©Cambridge Business Publishers, 2013
24
Advanced Accounting, 2nd Edition
P3.9
Merger and Stock Acquisition, Merger-Related Costs
d.
Using current GAAP, 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)
688,300
3,315,600
3,514,175
4,000
38,325
Requirement c. (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 current GAAP, the
Investment account balance on the books of MCBC is $38,325 lower.
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2013
25
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 BRI 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. The captive nature of the entities
leads to the conclusion that MCBC directs the activities the most significantly affect the
performance of these ventures. There may be other agreements not disclosed that also
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.
©Cambridge Business Publishers, 2013
26
Advanced Accounting, 2nd Edition
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
Intangible: Lease
Intangible: Service contracts
Intangible: Trade name
Goodwill
Total assets
Current liabilities
Long-term liabilities
Stockholders’ equity
Solutions Manual, Chapter 3
Prince
$ 1,000
6,000
-15,000
40,000
35,000
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
©Cambridge Business Publishers, 2013
27
P3.11 Identifiable Intangibles and Goodwill
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.
©Cambridge Business Publishers, 2013
28
Advanced Accounting, 2nd Edition
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 ASC Topic 810, 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).
Solutions Manual, Chapter 3
©Cambridge Business Publishers, 2013
29