Advanced Financial Accounting 12th Edition by Theodore Christensen solution manual

 
Q1-13  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.
 
Q1-14  A bargain purchase occurs 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.
 
Q1-15  The acquirer should record the clarification of the acquisition-date fair value of buildings as a reduction to buildings and addition to goodwill.
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Q1-16  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).
 

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 Kline Company acquisition.
 
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. Kline should record the $200,000 finders’ fee and $90,000 legal fees for transferring Kline’s assets and liabilities to Troy 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
 
a. AT&T had a vast cable customer base, but felt that TimeWarner’s content would greatly enhance the demand for its cable services.
 
b. AT&T provided TimeWarner shareholders with AT&T stock and an equal value of cash.
 
c. The cash portion of the merger was funded primarily with debt.
 
d. This would be a statutory merger since (1) the AT&T name survived through the merger and (2) the acquisition was formalized when AT&T gave both stock and cash.
C1-3  Business Combinations
 
It is very difficult to develop a single explanation for any series of events. Merger activity in the United States is impacted by events both within the U.S. economy and those around the world. As a result, there are many potential answers to the questions posed in this case.