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ANSWERS TO QUESTIONS
Q1-2 The split-off and spin-off result in the same reduction of reported assets and liabilities.
Only the stockholders equity accounts of the company are different. The number of shares
outstanding remains unchanged in the case of a spin-off and retained earnings or paid-in
capital is reduced. Shares of the parent are exchanged for shares of the subsidiary in a split-
off, thereby reducing the outstanding shares of the parent company.
Q1-3 The management of Enron appears to have used special purpose entities to avoid
reporting debt on its balance sheet and to create fictional transactions that resulted in
reported income. It also transferred bad loans and investments to special purpose entities to
avoid recognizing losses in its income statement.
Q1-4 (a) A statutory merger occurs when one company acquires another company and
the assets and liabilities of the acquired company are transferred to the acquiring company;
the acquired company is liquidated, and only the acquiring company remains.
(b) A statutory consolidation occurs when a new company is formed to acquire the assets
and liabilities of two combining companies; the combining companies dissolve, and the new
company is the only surviving entity.
(c) A stock acquisition occurs when one company acquires a majority of the common stock
of another company and the acquired company is not liquidated; both companies remain as
separate but related corporations.
Q1-5 Assets and liabilities transferred to a new wholly-owned subsidiary normally are
transferred at book value. In the event the value of an asset transferred to a newly created
entity has been impaired prior to the transfer and its fair value is less than the carrying value
on the transferring companys books, the transferring company should recognize an
impairment loss and the asset should then be transferred to the entity at the lower value.
Q1-6 The introduction of the concept of beneficial interest expands those situations in which
consolidation is required. Existing accounting standards have focused on the presence or
absence of equity ownership. Consolidation and equity method reporting have been required
when a company holds the required level of common stock of another entity. The beneficial
interest approach says that even when a company does not hold stock of another company,
consolidation should occur whenever it has a direct or indirect ability to make decisions
significantly affecting the results of activities of an entity or will absorb a majority of an entitys
expected losses or receive a majority of the entitys expected residual returns.
1-1
Chapter 1
Q1-7* Under pooling of interests accounting, the book values of the acquired company
were carried forward rather than being revalued to fair values that often were higher than
book values, thereby avoiding increased depreciation charges on revalued fixed assets.
During most of the time pooling accounting was acceptable, goodwill was required to be
amortized, and, because no goodwill was recognized under pooling, those amortization
charges were avoided. The carrying forward of retained earnings of all combining companies
may, in some cases, have given management increased flexibility with respect to dividends.
Operating results of the combining companies were combined for the full year in which the
combination occurred, not just from the point of combination, resulting in more favorable
reported results in the year of the business combination. The pooling method hides the value
of the consideration given, shielding management from stockholder criticism in those cases
where management paid an excessive amount for the company acquired.
Q1-8* Purchase accounting normally results in increased dollar amounts reported in the
balance sheet. Recognition of the fair values of identifiable assets and liabilities acquired
typically results in larger dollar amounts being reported. In addition, goodwill is recorded as
an asset under purchase accounting, but not recognized in a pooling. Because retained
earnings are not carried forward in a purchase, retained earnings typically is lower; however,
recognition of the fair value of shares issued typically results in larger paid-in capital account
balances. Increased depreciation charges and the amortization or impairment of goodwill
generally result in lower reported net income when purchase treatment is used.
Q1-9 Goodwill arises when purchase accounting is used and the fair value of the
compensation given to acquire another company is greater than the fair value of its
identifiable net assets. Goodwill is recorded on the books of the acquiring company when the
net assets of the acquired company are transferred to the acquiring company and recorded
on the acquiring company's books. When the acquired company is operated as a separate
entity, the amount paid by the purchaser is included in the investment account and goodwill,
as such, is not recorded on the books of either company. In this case, goodwill is only
reported when the investment account of the parent is eliminated in the consolidation
process.
Q1-10 The purchase of a company is viewed in the same way as any other purchase of
assets. The acquired company is owned by the acquiring company only for the portion of the
year subsequent to the combination. Therefore, earnings are accrued only from the date of
purchase forward.
Q1-11 None of the retained earnings of the subsidiary should be carried forward under
purchase treatment. Thus, consolidated retained earnings is limited to the balance reported
by the acquiring company.
Q1-12 Some companies have attempted to establish the corporate name as a symbol of
quality or product availability. An acquiring company may be fearful that customers will be
lost if the company is liquidated. Debt covenants are likely to require repayment of virtually all
existing debt if the acquired company is liquidated. The cost of issuing new debt may be
prohibitive. A parent-subsidiary relationship may be the only feasible means of proceeding if
it is impossible to acquire 100 percent ownership of an acquired company. When the
acquiring company does not plan to retain all operations of the acquired company, it may be
easier to dispose of the portions not wanted by leaving them in the existing corporate shell
and later disposing of the ownership of the company.
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Chapter 1
Q1-13 Negative goodwill is said to exist when a purchaser pays less than the fair value of
the identifiable net assets of another company in acquiring its ownership. This difference
normally is treated as a pro rata reduction of all of the acquired assets other than cash and
cash equivalents, trade receivables, inventory, financial instruments that are required by U.S.
generally accepted accounting principles (GAAP) to be carried on the balance sheet at fair
value, assets to be disposed of by sale, and deferred tax assets.
Q1-14 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 must be recognized if the carrying amount of the goodwill assigned to the reporting
unit is greater than the implied value of the carrying units goodwill. The implied value of the
reporting units goodwill is determined as the excess of the fair value of the reporting unit
over the fair value of its net assets excluding goodwill.
Q1-16 A purchase is treated prospectively. None of the financial statement data of the
acquired company is included along with the financial statement data of the acquiring
company for periods prior to the business combination.
Q1-17 When purchase treatment is used, all costs incurred in purchasing the ownership of
another company are capitalized. These normally include items such as finder's fees, the
costs of title transfer, and legal fees associated with the purchase.
Q1-18 When the acquiring company issues shares of stock to complete a business
combination recorded as a purchase, the excess of the fair value of the stock issued over its
par value is recorded as additional paid-in capital. All costs incurred by the acquiring
company in issuing the securities should be treated as a reduction in the additional paid-in
capital. Items such as audit fees associated with the registration of securities, listing fees,
and brokers' commissions should be treated as reductions of additional paid-in capital when
stock is issued. An adjustment to bond premium or bond discount is needed when bonds are
used to complete the purchase.
1-3
Chapter 1
SOLUTIONS TO CASES
a. In the past, when goodwill was capitalized, Indonesian companies were required to
systematically amortize the amount recorded, thereby reducing earnings, while companies in
other countries were not required to do so. Recent changes in accounting for goodwill have
substantially eliminated this objection.
MEMO
From: , Ak.
The accounting standards applicable to the 2003 acquisition require that all of the direct
costs of purchasing another company be treated as part of the total cost of the acquired
company. The costs incurred in issuing common or preferred stock in a business
combination should be treated as a reduction of the otherwise determinable fair value of the
securities. [FASB 141, Par. 24]
1-4
Chapter 1
C1-2 (continued)
While one might argue that the Rp370,000,000 was an indirect cost, it resulted directly from
the exchange of shares used to complete the business combination and should be included
in the amount assigned to the cost of acquiring ownership of PT Caraka. Of the total costs
incurred, Rp660,000,000 should be assigned to the purchase price of PT Caraka and
Rp60,000 recorded as a reduction of paid-in-capital.
Under the proposed standard, if PT Pusaka were to incur a total of Rp720,000,000 in costs
when it acquires PT Caraka, the full amount would be recorded as an expense.
Primary citation
FASB 141, Par. 24
FASB Project Update
b. The FASB has not dealt with leveraged buyouts in either current pronouncements or
exposure drafts of proposed standards. The Emerging Issues Task Force has addressed
limited aspects of accounting for LBOs. In EITF 84-23, Leveraged Buyout Holding
Company Debt, the Task Force did not reach a consensus. In EITF 88-16, Basis in
Leveraged Buyout Transactions, the Task Force did provide guidance as to the proper basis
that should be recognized for an acquiring companys interest in a target company acquired
through a leveraged buyout.
c. Whether an LBO is a type of business combination is not clear and probably depends on
the structure of the buyout. The FASB has not taken a position on whether an LBO is a type
of business combination. The EITF indicated that LBOs of the type it was considering are
similar to business combinations. Most LBOs are effected by establishing a holding
company for the purpose of acquiring the assets or stock of the target company. Such a
holding company has no substantive operations. Some would argue that a business
combination can occur only if the acquiring company has substantive operations. However,
neither the FASB nor EITF has established such a requirement. Thus, the question of
whether an LBO is a business combination is unresolved.
d. The primary issue in deciding the proper basis for an interest in a company acquired in an
LBO, as determined by EITF 88-16, is whether the transaction has resulted in a change in
Solutions Manual Adaptasi Baker / Lembke / King / Jeffrey,
Advanced Financial AccountingAn Indonesian Perspective
1-5
Chapter 1
control of the target company (a new controlling shareholder group has been established). If
a change in control has not occurred, the transaction is treated as a recapitalization or
restructuring, and a change in basis is not appropriate (the previous basis carries over). If a
change in control has occurred, a new basis of accounting may be appropriate.
1-6
Chapter 1
SOLUTIONS TO EXERCISES
1. b
2. d
3. a
4. b
5. d
1. a
2. c
3. d
4. d
5. d
6. b
1. d
2. d
3. c
4. c
5. d
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Chapter 1
1. c
2. c
3. b
4. b
5. b
Cash 21,000,000
Inventory 37,000,000
Land 80,000,000
Buildings 240,000,000
Equipment 90,000,000
Accumulated Depreciation Buildings 24,000,000
Accumulated Depreciation Equipment 36,000,000
Common Stock 60,000,000
Additional Paid-In Capital 348,000,000
1-8
Chapter 1
Cash 40,000,000
Accounts Receivable 75,000,000
Inventory 50,000,000
Land 35,000,000
Buildings 160,000,000
Equipment 240,000,000
Allowance for Uncollectible
Accounts Receivable 7,000,000
Accumulated Depreciation Buildings 35,000,000
Accumulated Depreciation Equipment 60,000,000
Common Stock 120,000,000
Additional Paid-In Capital 378,000,000
1-9
Chapter 1
a. Journal entry recorded by PT Fajar for transfer of assets and accounts payable to PT
Kelana:
b. Journal entry recorded by PT Kelana for receipt of assets and accounts payable from PT
Fajar:
Cash 15,000,000
Accounts Receivable 24,000,000
Inventory 9,000,000
Land 3,000,000
Depreciable Assets 65,000,000
Accumulated Depreciation 28,000,000
Accounts Payable 22,000,000
Common Stock 48,000,000
Additional Paid-In Capital 18,000,000
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Chapter 1
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Chapter 1
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Chapter 1
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Chapter 1
a. Goodwill of Rp80,000,000 will be reported. The fair value of the reporting unit
(Rp340,000,000) is greater than the carrying amount of the investment
(Rp290,000,000) and the goodwill does not need to be tested for impairment.
a. No impairment loss will be recognized. The fair value of the reporting unit
(Rp530,000,000) is greater than the carrying value of the investment
(Rp500,000,000) and goodwill does not need to be tested for impairment.
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Chapter 1
Reporting Unit C: No goodwill should be reported. The fair value of the net assets
(Rp400,000,000) exceeds the fair value of the reporting unit (Rp370,000,000).
a. Goodwill of Rp150,000,000 will be reported. The fair value of the reporting unit
(Rp580,000,000) is greater than the carrying value of the investment
(Rp550,000,000) and goodwill does not need to be tested for impairment.
d. No goodwill will be reported. The fair value of the net assets (Rp490,000,000)
exceeds the fair value of the reporting unit (Rp460,000,000). Thus, the implied
value of goodwill is Rp0 and an impairment loss of Rp150,000,000
(Rp150,000,000 - Rp0) must be recognized.
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Chapter 1
1 - 16
Chapter 1
Computation of goodwill
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Chapter 1
Cash 70,000,000
Accounts Receivable 110,000,000
Inventory 200,000,000
Land 100,000,000
Buildings and Equipment 350,000,000
Goodwill (1) 84,000,000
Accounts Payable 195,000,000
Bonds Payable 100,000,000
Bond Premium 5,000,000
Common Stock 320,000,000
Additional Paid-In Capital (2) 211,000,000
Deferred Merger Costs 54,000,000
Deferred Stock Issue Costs 29,000,000
1 - 18
Chapter 1
E1-19 (continued)
Cash 70,000,000
Accounts Receivable 110,000,000
Inventory 200,000,000
Land (3) 83,111,000
Buildings and Equipment (3) 290,889,000
Accounts Payable 195,000,000
Bonds Payable 100,000,000
Bond Premium 5,000,000
Preferred Stock (Rp10 x 8,000) 80,000,000
Additional Paid-In Capital (4) 291,000,000
Deferred Merger Costs 54,000,000
Deferred Stock Issue Costs 29,000,000
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Chapter 1
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Chapter 1
SOLUTIONS TO PROBLEMS
Cash 25,000,000
Inventory 70,000,000
Land 60,000,000
Buildings 170,000,000
Equipment 90,000,000
Accounts Payable 45,000,000
Accumulated Depreciation Buildings 40,000,000
Accumulated Depreciation Equipment 10,000,000
Common Stock 180,000,000
Additional Paid-In Capital 140,000,000
1 - 21
Chapter 1
Cash 30,000,000
Accounts Receivable 45,000,000
Inventory 60,000,000
Land 20,000,000
Buildings and Equipment 300,000,000
Allowance for Uncollectible Accounts Receivable 5,000,000
Accumulated Depreciation 40,000,000
Accounts Payable 10,000,000
Common Stock 50,000,000
Additional Paid-In Capital 350,000,000
b. PT Jari-jari would report its investment in PT Baharu equal to the book value of net
assets transferred of Rp138,000,000 (Rp152,000,000 - Rp14,000,000).
e. No effect. The shares outstanding reported by PT Jari-jari are not affected by the creation
of PT Baharu.
1 - 22
Chapter 1
Computation of goodwill
1 - 23
Chapter 1
Land Rp - (Rp35,000,000 x = Rp
200,000,000 .10) 196,500,000
Buildings 1,500,000,000 - (Rp35,000,000 x = 1,473,750,000
.75)
Equipment 300,000,000 - (Rp35,000,000 x = 294,750,000
.15)
1 - 24
Chapter 1
P1-25 (continued)
(1) Goodwill:
Total purchase price:
Value of stock issued (Rp4,000 x 900,000) Rp3,600,000,000
Merger costs 38,000,000
Total purchase price Rp3,638,000,000
Fair value of net assets acquired
(Rp41,000,000 + Rp73,000,000 + Rp144,000,000 +
Rp200,000,000
+ Rp1,500,000,000 + Rp300,000,000 - Rp35,000,000
- Rp50,000,000 - Rp500,000,000) (1,673,000,000)
Goodwill Rp1,965,000,000
1 - 25
Chapter 1
Cash 20,000,000
Accounts Receivable 35,000,000
Inventory 50,000,000
Patents 60,000,000
Buildings and Equipment 150,000,000
Goodwill 38,000,000
Accounts Payable 55,00,0000
Notes Payable 120,000,000
Cash 178,000,000
1 - 26
Chapter 1
Cash 50,000,000
Inventory 150,000,000
Buildings and Equipment (net) 240,000,000
Patent 160,000,000
Accounts Payable 30,000,000
Cash 565,000,000
Deferred Merger Costs 5,000,000
1 - 27
Chapter 1
1 - 28
Chapter 1
Reporting Unit
A B C
Carrying value of goodwill Rp70,000 Rp80,000,000 Rp40,00
,000 0,000
Implied goodwill at year-end 90,000,0 50,000,000 75,000,
00 000
Goodwill to be reported at year-end 70,000,0 50,000,000 40,000,
00 000
Reporting unit B
Fair value of reporting unit Rp440,000,000
Fair value of identifiable assets Rp450,000,000
Fair value of accounts payable (60,000,000)
Fair value of net assets (390,000,000)
Implied goodwill at year-end Rp 50,000,000
Reporting unit C
Fair value of reporting unit Rp265,000,000
Fair value of identifiable assets Rp200,000,000
Fair value of accounts payable (10,000,000)
Fair value of net assets (190,000,000)
Implied goodwill at year-end Rp 75,000,000
1 - 29
Chapter 1
Journal entries to record acquisition of PT Baja Ringan net assets under purchase
treatment:
Computation of goodwill
1 - 30
Chapter 1
Cash 30,000,000
Accounts Receivable 60,000,000
Inventory 160,000,000
Land 30,000,000
Buildings and Equipment 350,000,000
Bond Discount 5,000,000
Goodwill 125,000,000
Accounts Payable 10,000,000
Bonds Payable 150,000,000
Common Stock 80,000,000
Additional Paid-In Capital 520,000,000
Cash 300,000
Accounts Receivable 17,000,000
Inventory 35,000,000
Plant and Equipment 500,000,000
Other Assets 25,800,000
Goodwill 86,500,000
Allowance for Uncollectibles 1,400,000
Accounts Payable 8,200,000
Notes Payable 10,000,000
Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e
1 - 31
Chapter 1
1 - 32
Chapter 1
1 - 33
Chapter 1
a. Rp14,000 = Rp70,000,000/Rp5,000
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Chapter 1
Cash 28,000,000
Accounts Receivable 258,000,000
Inventory 395,000,000
Long-Term Investments 175,000,000
Land 100,000,000
Rolling Stock 63,000,000
Plant and Equipment 2,500,000,000
Patents 500,000,000
Special Licenses 100,000,000
Discount on Equipment Trust Notes 5,000,000
Discount on Debentures 50,000,000
Goodwill 244,700,000
Allowance for Bad Debts 6,500,000
Current Payables 137,200,000
Mortgages Payable 500,000,000
Premium on Mortgages Payable 20,000,000
Equipment Trust Notes 100,000,000
Debentures Payable 1,000,000,000
Common Stock 180,000,000
Additional Paid-In Capital Common 2,298,000,000
Deferred Merger Costs 135,000,000
Deferred Stock Issue Costs 42,000,000
Computation of goodwill
1 - 35
Chapter 1
P1-36 (continued)
1 - 36