CHAPTER 1

CHAPTER 1
INTERCORPORATE ACQUISITIONS AND INVESTMENTS IN OTHER ENTITIES
ANSWERS TO QUESTIONS
Q1-1 Complex organizational structures often result when companies do business in a

complex business environment. New subsidiaries or other entities may be formed for
purposes such as extending operations into foreign countries, seeking to protect existing
assets from risks associated with entry into new product lines, separating activities that fall
under regulatory controls, and reducing taxes by separating certain types of operations.
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.
Solutions Manual Adaptasi Baker / Lembke / King / Jeffrey,

Advanced Financial AccountingAn Indonesian Perspective
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.

1-2
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.
Q1-15 Additional paid-in capital reported following a business combination recorded as a

purchase is the amount previously reported on the acquiring company's books plus the
excess of the fair value over the par or stated value of any shares issued by the acquiring
company in completing the acquisition.
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
C1-1 Reporting Alternatives and International Harmonization
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.
b. Indonesian companies must be concerned about accounting standards in other countries

and about international standards (i.e., those issued by the International Accounting
Standards Committee). Companies operate in a global economy today; not only do they buy
and sell products and services in other countries, but they may raise capital and have
operations located in other countries. Such companies may have to meet foreign reporting
requirements, and these requirements may differ from Indonesian reporting standards. Thus,
many Indonesian companies, and not just the largest, may find foreign and international
reporting standards relevant if they are going to operate globally.
C1-2 Assignment of Acquisition Costs
MEMO
To: Vice-President of Finance

PT Pusaka
From: , Ak.
Re: Recording Acquisition Costs of Business Combination
PT Pusaka incurred a variety of costs in acquiring the ownership of PT Caraka and

transferring the assets and liabilities of PT Caraka to PT Pusaka. I was asked to review the
relevant accounting literature and provide my recommendations on the appropriate treatment
of the costs incurred in the acquisition of PT Caraka.
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]
A total of Rp720,000,000 was paid by PT Pusaka in completing its acquisition of PT Caraka.

The Rp200,000,000 finders fee and Rp90,000 of legal fees for transferring PT Carakas
assets and liabilities to PT Pusaka should be included in the purchase price of PT Caraka.
The Rp60,000,000 payment for stock registration and audit fees should be recorded as a
reduction of paid-in capital recorded when the PT Pusaka shares were issued to acquire the
shares of PT Caraka. The only cost potentially at issue is the Rp370,000,000 of legal fees
resulting from the litigation by the shareholders of PT Caraka. If this cost is considered to be
a direct cost, it should be included in the costs of acquiring PT Caraka. If, on the other hand,
it is considered an indirect or general expense, it should be charged to expense in 2003.
[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.
You also requested a summary of proposed changes to the requirements established in

FASB 141. A report on the current status of the FASBs proposals can be found under
ABusiness Combinations: Purchase Method Procedures, at the FASB website
(www.fasb.org/project/bc_purchmethod.shtml). The current proposal will permit only those
costs related to the business combination and paid to third parties to be included as part of
the exchange transaction. All other costs will be expensed. [FASB Project Update]
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
C1-3 Leveraged Buyouts
a. A leveraged buyout involves acquiring a company in a transaction or series of planned

transactions that include using a very high proportion of debt, often secured by the assets of
the target company. Normally, the investors acquire all of the stock or assets of the target
company. A management buyout occurs when the existing management of a company
acquires all or most of the stock or assets of the company. Frequently, the investors in LBOs
include management, and thus an LBO may also be an MBO
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
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
E1-1 Multiple-Choice Questions on Complex Organizations
1. b
2. d
3. a
4. b
5. d
E1-2 Multiple-Choice Questions on Recording Business Combinations

[AICPA Adapted]
1. a
2. c
3. d
4. d
5. d
6. b
E1-3 Multiple-Choice Questions on Reported Balances [AICPA Adapted]
1. d
2. d
3. c
4. c
5. d

1-7
Chapter 1
E1-4 Multiple-Choice Questions Involving Account Balances
1. c
2. c
3. b
4. b
5. b
E1-5 Asset Transfer to Subsidiary
a. Journal entry recorded by PT Temaram for transfer of assets to PT Terang:
Investment in PT Terang Common Stock 408,000,000

Accumulated Depreciation Buildings 24,000,000
Accumulated Depreciation Equipment 36,000,000
Cash 21,000,000
Inventory 37,000,000
Land 80,000,000
Buildings 240,000,000
Equipment 90,000,000
b. Journal entry recorded by PT Terang for receipt of assets from PT Temaram:
Cash 21,000,000
Land 80,000,000
Common Stock 60,000,000
Additional Paid-In Capital 348,000,000

1-8
Chapter 1
E1-6 Creation of New Subsidiary
a. Journal entry recorded by PT Lentera for transfer of assets to PT Mahameru:
Investment in PT Mahameru Common Stock 498,000,000

Allowance for Uncollectible Accounts Receivable 7,000,000
Cash 40,000,000
Accounts Receivable 75,000,000
Land 35,000,000
b. Journal entry recorded by PT Mahameru for receipt of assets from PT Lentera:
Cash 40,000,000
Land 35,000,000
Allowance for Uncollectible

1-9
Chapter 1
E1-7 Balance Sheet Totals of Parent Company
a. Journal entry recorded by PT Fajar for transfer of assets and accounts payable to PT
Kelana:
Investment in PT Kelana Common Stock 66,000,000

Accumulated Depreciation 28,000,000
Accounts Payable 22,000,000
Cash 15,000,000
Inventory 9,000,000
Land 3,000,000
Depreciable Assets 65,000,000
b. Journal entry recorded by PT Kelana for receipt of assets and accounts payable from PT
Fajar:
Cash 15,000,000
Inventory 9,000,000
Land 3,000,000
Depreciable Assets 65,000,000

1 - 10
Chapter 1
E1-8 Stock Acquisition
Journal entry to record the purchase of PT Tenggara, shares:
Investment in PT Tenggara, Common Stock 986,000,000

Rp986,000,000 = Rp58,000 x 17,000 shares
Rp425,000,000 = Rp25,000 x 17,000 shares
Rp561,000,000 = (Rp58,000 - Rp25,000) x 17,000
shares

1 - 11
Chapter 1
E1-9 Balances Reported Following Combination
a. Stock Outstanding: Rp200,000,000 + (Rp10,000 x 8,000 shares) Rp280,000,000
b. Cash and Receivables: Rp150,000,000 + Rp40,000,000 190,000,000
c. Land: Rp100,000,000 + Rp85,000,000 185,000,000
d. Buildings and Equipment (net): Rp300,000,000 + Rp230,000,000 530,000,000
e. Goodwill: (Rp50,000 x 8,000) - Rp355,000,000 45,000,000
f. Additional Paid-In Capital:

Rp20,000,000 + [(Rp50,000 - Rp10,000) x 8,000] 340,000,000
g. Retained Earnings 330,000,000
E1-10 Goodwill Recognition
Journal entry to record acquisition of PT Sempurna net assets:
Cash and Receivables 40,000,000

Land 30,000,000
Plant and Equipment 350,000,000
Patent 130,000,000
Goodwill 55,000,000
Cash 670,000,000

1 - 12
Chapter 1
E1-11 Negative Goodwill
Journal entry to record acquisition of PT Mufakat net assets:
Cash and Receivables 50,000,000

Land 91,000,00
Discount on Bonds Payable 16,000,000
Bonds Payable 580,000,000
Computation of negative goodwill
Purchase price Rp564,000,000

Fair value of assets acquired Rp650,000,000
Fair value of liabilities assumed (50,000,000)
Fair value of net assets acquired 600,000,000
Negative goodwill Rp 36,000,000
Assignment of negative goodwill to noncurrent assets
Reduction for Assigned

Asset Fair Value Negative Goodwill* Valuation
Land Rp100,000,000 Rp36,000,000 x Rp 91,000,000
(100/400)
Rp36,000,000 x
Plant and Equipment 300,000,000 (300/400) 273,000,000
Rp400,000,000 Rp364,000,000
*Based on relative fair values.

1 - 13
Chapter 1
E1-12 Impairment of Goodwill
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.
b. Goodwill of Rp35,000,000 will be reported (fair value of reporting unit of

Rp280,000,000 - fair value of net assets of Rp245,000,000). An impairment loss
of Rp45,000,000 (Rp80,000,000 - Rp35,000,000) will be recognized.
c. Goodwill of Rp15,000,000 will be reported (fair value of reporting unit of

Rp260,000,000 - fair value of net assets of Rp245,000,000). An impairment loss
of Rp65,000,000 (Rp80,000,000 - Rp15,000,000) will be recognized.
E1-13 Assignment of Goodwill
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.
b. An impairment of goodwill of Rp15,000,000 will be recognized. The implied value of

goodwill is Rp45,000,000 (Rp485,000,000 - Rp440,000,000), which represents a
Rp15,000,000 decrease from the original Rp60,000,000.
c. An impairment of goodwill of Rp50,000,000 will be recognized. The implied value of

goodwill is Rp10,000,000 (Rp450,000,000 - Rp440,000,000), which represents a
Rp50,000,000 decrease from the original Rp60,000,000.

1 - 14
Chapter 1
E1-14 Goodwill Assigned to Reporting Units
Goodwill of Rp158,000,000 (Rp60,000,000 + Rp48,000,000 + Rp0 + Rp50,000,000)

should be reported, computed as follows:
Reporting Unit A: Goodwill of Rp60,000,000 should be reported. The implied value

of goodwill is Rp90,000,000 (Rp690,000,000 - Rp600,000,000) and the carrying
amount of goodwill is Rp60,000,000.
Reporting Unit B: Goodwill of Rp48,000,000 should be reported. The fair value of

the reporting unit (Rp335,000,000) is greater than the carrying value of the
investment (Rp330,000,000).
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).
Reporting Unit D: Goodwill of Rp50,000,000 should be reported. The fair value of

the reporting unit (Rp585,000,000) is greater than the carrying value of the
investment (Rp520,000,000).
E1-15 Goodwill Measurement
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.
b. Goodwill of Rp50,000,000 will be reported. The implied value of goodwill is

Rp50,000,000 (fair value of reporting unit of Rp540,000 - fair value of net assets
of Rp490,00,0000). Thus, an impairment of goodwill of Rp100,000
(Rp150,000,000 - Rp50,000,000) must be recognized.
c. Goodwill of Rp10,000,000 will be reported. The implied value of goodwill is

Rp10,000,000 (fair value of reporting unit of Rp500,000,000 - fair value of net
assets of Rp490,000,000). Thus, an impairment loss of Rp140,000,000
(Rp150,000,000 - Rp10,000,000) must be recognized.
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.

1 - 15
Chapter 1
E1-16 Computation of Fair Value
Amount paid Rp517,000,000

Book value of assets Rp624,000,000
Book value of liabilities (356,000,000)
Book value of net assets Rp268,000,000
Adjustment for research and development costs (40,000,000)
Adjusted book value Rp228,000,000
Fair value of patent rights 120,000,000
Goodwill recorded 93,000,000 (441,000,000)
Fair value increment of buildings and equipment Rp 76,000,000
Book value of buildings and equipment 341,000,000
Fair value of buildings and equipment Rp417,000,000
E1-17 Computation of Shares Issued and Goodwill
a. 15,600 shares were issued, computed as follows:
Par value of shares outstanding following merger Rp327,600,000

Paid-in capital following merger 650,800,000
Total par value and paid-in capital Rp978,400,000
Par value of shares outstanding before merger Rp218,400,000
Paid-in capital before merger 370,000,000
(588,400,000)
Increase in par value and paid-in capital Rp390,000,000
Divide by price per share Rp25,000
Number of shares issued 15,600
b. The par value is Rp7,000, computed as follows:
Increase in par value of shares outstanding

(Rp327,600,000 - Rp218,400,000)
Divide by number of shares issued Rp109,200,000
Par value 15,600
Rp 7,000
c. Goodwill of Rp34,000,000 was recorded, computed as follows:
Increase in par value and paid-in capital Rp390,000,000

Fair value of net assets (Rp476,000,000 -
Rp120,000,000) (356,000,000)
Goodwill Rp 34,000

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Chapter 1
E1-18 Combined Balance Sheet
a. Purchase balance sheet based on Rp60,000 market price:
PT Adam and PT Bentara

Combined Balance Sheet
January 1, 20X2
Cash and Receivables Rp 240,000,000 Accounts Payable Rp 125,000,000

Inventory 460,000,000 Notes Payable 235,000,000
Buildings and Equipment 840,000,000 Common Stock 244,000,000
Less: Accumulated Additional Paid-In
Depreciation (250,000,000) Capital 556,000,000
Goodwill 75,000,000 Retained Earnings 205,000,000
Rp1,365,000,000 Rp1,365,000,000
Computation of goodwill
Total purchase price (Rp60 x 8,000 shares) Rp480,000,000

Fair value of net identifiable assets
(Rp490,000 - Rp85,000) (405,000,000)
Goodwill Rp 75,000,000
b. Purchase balance sheet based on Rp48,000 market price:
PT Adam and PT Bentara

January 1, 20X2
Cash and Receivables Rp 240,000,000 Accounts Payable Rp 125,000,000

Inventory 460,000,000 Notes Payable 235,000,000
Buildings and Equipment 819,000,000 Common Stock 244,000,000
Less: Accumulated Additional Paid-In
Depreciation (250,000,000) Capital 460,000,000
Retained Earnings 205,000,000
Rp1,269,000,000 Rp1,269,000,000
Fair value of buildings and equipment Rp240,000,000

Fair value of total assets acquired Rp490,000,000
Less: Fair value of liabilities assumed (85,000,000)
Fair value of net assets acquired Rp405,000,000
Value of shares issued in acquisition (384,000,000)
Negative goodwill assigned against noncurrent (21,000,000)
assets
Valuation of Best's noncurrent assets included in Rp219,000,000
balance sheet

1 - 17
Chapter 1
E1-19 Recording a Business Combination
a. Deferred Merger Costs 54,000,000

Deferred Stock Issue Costs 29,000,000
Cash 83,000,000
Cash 70,000,000
Land 100,000,000
Buildings and Equipment 350,000,000
Goodwill (1) 84,000,000
Bond Premium 5,000,000
Additional Paid-In Capital (2) 211,000,000
Deferred Merger Costs 54,000,000
(1) Computation of goodwill:
Market value of shares issued

(Rp14,000 x 40,000) Rp560,000,000
Merger costs 54,000,000
Fair value of net assets acquired (530,000,000)
Goodwill Rp84,000,000
(2) Computation of additional paid-in capital:

(Rp14,000 x 40,000) Rp560,000,000
Par value of shares issued (Rp8,000 x (320,000,000)
40,000)
Additional paid-in capital from issuing shares Rp240,000,000
Stock issue costs (29,000,000)
Additional paid-in capital recorded Rp211,000,000

1 - 18
Chapter 1
E1-19 (continued)
b. Deferred Merger Costs 54,000,000

Cash 83,000,000
Cash 70,000,000
Land (3) 83,111,000
Buildings and Equipment (3) 290,889,000
Bond Premium 5,000,000
Preferred Stock (Rp10 x 8,000) 80,000,000
(3) Computation of negative goodwill:

(Rp50,000 x 8,000) Rp400,000,000
Negative goodwill Rp76,000,000
Assignment of negative goodwill:
Reduction for Assigned

Item Fair Value Negative Goodwill* Valuation
Land Rp100,000,000 Rp76,000,000 x Rp83,111,000
(100/450)
Rp76,000,000 x
Buildings and Equip. 350,000,000 (350/450) 290,889,000
Rp450,000,000 Rp374,000,000
(4) Market value of shares issued (Rp50,000 x 8,000) Rp400,000,000

Par value of shares issued (Rp10,000 x 8,000) (80,000,000)
Additional paid-in capital from issuing shares Rp320,000,000
Stock issue costs (29,000,000)
Additional paid-in capital recorded Rp291,000,000
E1-20 Reporting Income
20X2: Net income = Rp6,028,000 [Rp2,500,000 + Rp3,528,000]

Earnings per share = Rp5.48 [Rp6,028,000 / (1,000,000 + 100,000)]
20X1: Net income = Rp4,460,000 [previously reported]

1 - 19
Chapter 1
Earnings per share = Rp4.46 [Rp4,460,000 / 1,000,000]

1 - 20
Chapter 1
SOLUTIONS TO PROBLEMS
P1-21 Assets and Accounts Payable Transferred to Subsidiary
a. Journal entry recorded by PT Tabanan for its transfer of

assets and accounts payable to PT Catur:
Investment in PT Catur Common Stock 320,000,000

Cash 25,000,000
Land 60,000,000
b. Journal entry recorded by PT Catur for receipt of assets

and accounts payable from PT Tabanan:
Cash 25,000,000
Land 60,000,000

1 - 21
Chapter 1
P1-22 Creation of New Subsidiary
a. Journal entry recorded by PT Elang Perkasa for transfer of assets

and accounts payable to PT Sindangsari:
Investment in PT Sindangsari Common Stock 400,000,000

Cash 30,000,000
Land 20,000,000
b. Journal entry recorded by PT Sindangsari for receipt of assets and

accounts payable from PT Elang Perkasa:
Cash 30,000,000
Land 20,000,000
P1-23 Incomplete Data on Creation of Subsidiary
a. The book value of assets transferred was Rp152,000,000 (Rp3,000,000 + Rp16,000,000

+ Rp27,000,000 + Rp9,000,000 + Rp70,000,000 + Rp60,000,000 - Rp21,000,000 -
Rp12,000,000).
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).
c. 8,000 shares (Rp40,000,000/Rp5,000).
d. Total assets declined by Rp14,000,000 (book value of assets transferred of

Rp152,000,000 - investment in PT Baharu of Rp138,000,000).
e. No effect. The shares outstanding reported by PT Jari-jari are not affected by the creation
of PT Baharu.

1 - 22
Chapter 1
P1-24 Journal Entries to Record a Business Combination
Journal entries to record acquisition of PT Taufik net assets:
(1) Deferred Merger Costs 14,000,000

Cash 14,000,000
Record payment of legal fees.
(2) Deferred Stock Issue Costs 28,000,000

Cash 28,000,000
Record costs of issuing stock.
(3) Cash and Receivables 28,000,000

Goodwill 26,000,000
Notes Payable 63,000,000
Record purchase of PT Taufik.
Values of shares issued (Rp22,000 x 24,000) Rp528,000,000

Legal fees 14,000,000
Total purchase price Rp542,000,000
Fair value of net assets acquired
(Rp620,000,000 - Rp104,000,000) (516,000,000)
Computation of additional paid-in capital
Number of shares issued 24,000,000

Issue price in excess of par value (Rp22,000 - Rp4,000) x Rp18,000
Total Rp432,000,000
Less: Deferred stock issue costs (28,000,000)
Increase in additional paid-in capital Rp404,000,000

1 - 23
Chapter 1
P1-25 Recording Business Combinations
a. 400,000 shares issued:

Cash 60,000,000
Cash and Equivalents 41,000,000

Land (1) 196,500,000
Buildings (1) 1,473,750,000
Equipment (1) 294,750,000
Short-Term Notes Payable 50,000,000
Common Stock Rp2 Par 800,000,000
(1) Negative goodwill:

Total purchase price:
Value of stock issued (Rp4,000 x 400,000) Rp1,600,000,000
Total purchase price Rp1,638,000,000
(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)
Negative goodwill Rp (35,000,000)
Allocation of negative goodwill:

Land Rp 200,000,000 / Rp2,000,000,000 = .10
Buildings 1,500,000,000 / Rp2,000,000,000 = .75
Equipment 300,000,000 / Rp2,000,000,000 = . 15
Rp2,000,000,000 1.00
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)
(2) Additional paid-in capital: Rp778,000,000 = Rp800,000,000 - Rp22,000,000

1 - 24
Chapter 1
P1-25 (continued)
b. 900,000 shares issued:

Cash 60,000,000
Cash and Equivalents 41,000,000

Land 200,000,000
Buildings 1,500,000,000
Goodwill (1) 1,965,000,000
Short-Term Notes Payable 50,000,000
Common Stock Rp2 Par 1,800,000,000
Additional Paid-In Capital (2) 1,778,000,000
(1) Goodwill:
Total purchase price:
(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
(2) Additional paid-in capital:

Rp1,778,000,000 = [(Rp4,000 - Rp2,000) x 900,000] -
Rp22,000,000

1 - 25
Chapter 1
P1-26 Business Combination with Goodwill
a. Journal entry to record acquisition of PT Zahari net assets:
Cash 20,000,000
Patents 60,000,000
Goodwill 38,000,000
Cash 178,000,000
b. Balance sheet immediately following acquisition:
PT Jangkarku and PT Zahari

February 1, 20X3
Cash Rp 82,000,000 Accounts Payable Rp140,000,000

Accounts Receivable 175,000,000 Notes Payable 270,000,000
Inventory 220,000,000 Common Stock 200,000,000
Patents 140,000,000 Additional Paid-In
Buildings and Equipment 530,000,000 Capital 160,000,000
Less: Accumulated Retained Earnings 225,000,000
Depreciation (190,000,000)
Goodwill 38,000,000
Rp995,000,000 Rp995,000,000
c. Journal entry to record acquisition of PT Zahari stock:
Investment in PT Zahari Common Stock 178,000,000

Cash 178,000,000

1 - 26
Chapter 1
P1-27 Negative Goodwill
Journal entries to record acquisition of PT Lahardo net assets:

Cash 5,000,000
Cash 50,000,000
Buildings and Equipment (net) 240,000,000
Patent 160,000,000
Cash 565,000,000
Computation of negative goodwill

(Rp700,000 - Rp30,000) (670,000,000)
Negative goodwill Rp100,000,000
Reduction for Negative Assigned

Item Fair Value Goodwill Valuation
Buildings and Equipment Rp300,000, Rp100,000,000 x Rp240,000,00
000 (300/500) 0
Patent Rp100,000,000 x
200,000,00 (200/500)
0 160,000,000
Rp500,000, Rp400,000,00
000 0

1 - 27
Chapter 1
P1-28 Computation of Account Balances
a. Liabilities reported by the Aspira Division at year-

end:
Fair value of reporting unit at year-end Rp930,000,000

Purchase price of reporting unit
(Rp7,600 x 100,000) Rp760,000,000
Fair value of net assets at acquisition
(Rp810,000,000 - Rp190,000,000) (620,000,000)
Goodwill at acquisition Rp140,000,000
Impairment in current year (30,000,000)
Goodwill at year-end (110,000,000)
Fair value of net assets at year-end Rp820,000,000
Fair value of assets at year-end Rp950,000,000

Fair value of net assets at year-end (820,000,000)
Fair value of liabilities at year-end Rp130,000,000
b. Required fair value of reporting unit:

Fair value of assets at year-end Rp 950,000,000
Fair value of liabilities at year-end (given) (70,000,000)
Fair value of net assets at year-end Rp 880,000,000
Original goodwill balance 140,000,000
Required fair value of reporting unit to avoid recognition of
impairment of goodwill Rp1,020,000,000

1 - 28
Chapter 1
P1-34 Goodwill Assigned to Multiple Reporting Units
a. Goodwill to be reported by PT Rojali:
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
Total goodwill to be reported at year-end:

Reporting unit A Rp 70,000,000
Reporting unit B 50,000,000
Reporting unit C 40,000,000
Total goodwill to be reported Rp160,000,000
Computation of implied goodwill

Reporting unit A
Fair value of reporting unit Rp400,000,0
00
Fair value of identifiable assets Rp350,000,
000
Fair value of accounts payable (40,000,00
0)
Fair value of net assets (310,000,00
0)
Implied goodwill at year-end Rp
90,000,000
Reporting unit B
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 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
b. Goodwill impairment of Rp30,000,000 (Rp80,000,000 - Rp50,000,000) must be

reported in the current period for reporting unit B.
Solutions Manual Baker / Lembke / King / Jeffrey, Advanced Financial Accounting, 7e
1 - 29
Chapter 1
P1-30 Journal Entries
Journal entries to record acquisition of PT Baja Ringan net assets under purchase
treatment:
(1) Deferred Merger Costs 19,000,000

Cash 19,000,000
Record finder's fee and transfer costs.
(2) Deferred Stock Issue Costs 9,000,000

Cash 9,000,000
Record audit fees and stock registration fees.
(3) Cash 60,000,000

Land 70,000,000
Bond Discount 20,000,000
Goodwill 114,000,000
Record purchase-type merger with PT Baja Ringan.
Value of shares issued (Rp50,000 x 12,000) Rp600,000,000

Finder's fee 10,000,000
Legal fees for asset transfer 9,000,000
Rp619,000,000
Additional Paid-In Capital
Rp471,000,000 = [(Rp50,000 - Rp10,000) x 12,000] -

Rp9,000,000
1 - 30
Chapter 1
P1-31 Purchase at More than Book Value
a. Journal entry to record acquisition of PT Sitakarya net

assets:
Cash 30,000,000
Land 30,000,000
Bond Discount 5,000,000
b. Balance sheet immediately following acquisition:
PT Randhika and PT Sitakarya

January 1, 20X2
Cash Rp 100,000,000 Accounts Rp

Payable 60,000,000
Accounts 160,000,000 Bonds Payable Rp450,000,000
Receivable
Inventory 360,000,000 Less: Discount (5,000,000) 445,000,000
Land 80,000,000 Common 280,000,000
Stock
Buildings and
Equipment 950,000,000Additional
Less: Accumulated Paid-In 560,000,000
Capital
Depreciation Retained 180,000,000
(250,000,000) Earnings
Rp1,525,000,000 Rp1,525,000,000
P1-32 Business Combination
Journal entry to record acquisition of PT Tut-Tut net assets:
Cash 300,000
Other Assets 25,800,000
Goodwill 86,500,000
Allowance for Uncollectibles 1,400,000
1 - 31
Chapter 1
Mortgage Payable 50,000,000

Capital Stock (Rp10 par) 90,000,000
Premium on Capital Stock 405,000,000
1 - 32
Chapter 1
P1-33 Combined Balance Sheet
a. Purchase balance sheet:
PT Budiman dan PT Sejahtera Bangsaku

January 1, 20X3
Cash and Receivables Rp110,000,000 Current Liabilities Rp 100,000,000

Inventory 142,000,000 Capital Stock 214,000,000
Land 115,000,000 Capital in Excess
Plant and Equipment 540,000,000 of Par Value 216,000,000
Less: Accumulated Retained Earnings 240,000,000
Depreciation (150,000,000)
Goodwill 13,000,000
Rp770,000,000 Rp 770,000,000
b. (1) Stockholders' equity with 1,100 shares issued
Capital Stock [Rp200,000,000 + (Rp20,000 x 1,100 shares)] Rp 222,000,000

Capital in Excess of Par Value
[Rp20,000,000 + (Rp300,000 - Rp20,000) x 1,100 shares] 328,000,000
Rp 790,000,000
(2) Stockholders' equity with 1,800 shares issued
Capital Stock [Rp200,000,000 + (Rp20,000 x 1,800 shares)] Rp

236,000,000
[Rp20,000 + (Rp300 - Rp20) x 1,800 shares] 524,000,000
Rp1,000,000,000
(3) Stockholders' equity with 3,000 shares issued
Capital Stock [Rp200,000,000 + (Rp20,000 x 3,000 shares)] Rp 260,000,000

[Rp20,000,000 + (Rp300,000 - Rp20,000) x 3,000 shares] 860,000,000
Rp1,360,000,000
1 - 33
Chapter 1
P1-34 Incomplete Data Problem
a. Rp5,200 = (Rp126,000,000 - Rp100,000,000)/Rp5,000
b. Rp208,000,000 = (Rp126,000,000 + Rp247,000,000) - (Rp100,000,000 + Rp65,000,000)
c. Rp46,000,000 = Rp96,000,000 - Rp50,000,000
d. Rp130,000,000 = (Rp50,000,000 + Rp88,000,000 + Rp96,000,000 + Rp430,000,000 -

Rp46,000,000 -
Rp220,000,000 - Rp6,000,000) - (Rp40,000,000 + Rp60,000,000 + Rp50,000,000 +
Rp300,000,000 -
Rp32,000,000 - Rp150,000,000 - Rp6,000,000)
e. Rp78,000,000 = Rp208,000,000 - Rp130,000,000
f. Rp97,000,000 (as reported by PT Endang)
g. Rp13,000,000 = (Rp430,000,000 - Rp300,000,000)/10 years
P1-35 Incomplete Data Following Purchase
a. Rp14,000 = Rp70,000,000/Rp5,000
b. Rp8,000 = (Rp70,000,000 + Rp42,000,000)/14,000
c. Rp7,000 = (Rp117,000,000 - Rp96,000,000)/Rp3,000
d. Rp364,000,000 = (Rp117,000,000 + Rp577,000,000) - (Rp96,000,000 + Rp234,000,000)
e. Rp24,000,000 = Rp65,000,000 + Rp15,000,000 - Rp56,000,000
f. Rp110,000,000 = Rp320,000,000 - Rp210,000,000
g. Rp306,000,000 = (Rp15,000,000 + Rp30,000,000 + Rp110,000,000 + Rp293,000,000) -

(Rp22,000,000 + Rp120,000,000)
h. Rp82,000,000 = Rp364,000,000 + Rp24,000,000 - Rp306,000,000
1 - 34
Chapter 1
P1-36 Comprehensive Business Combination Problem
a. Journal entries on the books of PT Integrasi Industri to record the combination:

Cash 135,000,000

Cash 42,000,000
Cash 28,000,000
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
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
Additional Paid-In Capital Common 2,298,000,000

Direct merger costs 135,000,000
Fair value of assets acquired Rp4,112,500,000
Fair value of liabilities assumed (1,702,200,000)
Fair value of net identifiable assets (2,410,300,000)
Goodwill Rp 244,700,000
1 - 35
Chapter 1
P1-36 (continued)
b. Journal entries on the books of PT Hidrologi Kimia to record the combination:
Investment in PT Integrasi Industri Stock 2,520,000,000

Allowance for Bad Debts 6,500,000
Current Payables 137,200,000
Mortgages Payable 500,000,000
Equipment Trust Notes 100,000,000
Debentures Payable 1,000,000,000
Discount on Bonds Payable 40,000,000
Cash 28,000,000
Long-Term Investments 150,000,000
Land 55,000,000
Rolling Stock 130,000,000
Plant and Equipment 2,425,000,000
Patents 125,000,000
Special Licenses 95,800,000
Gain on Sale of Assets and Liabilities 1,189,900,000
Record sale of assets and liabilities.

Additional Paid-In Capital Common Stock 4,500,000
Treasury Stock 12,000,000
Record retirement of Treasury Stock:*
Rp7,500,000 = Rp5,000 x 1,500 shares
Rp4,500,000 = Rp12,000,000 - Rp7,500,000

Additional Paid-In Capital Common 495,500,000
Additional Paid-In Capital Retirement
of Preferred 22,000,000
Retained Earnings 1,410,000,000
Investment in PT Integrasi Industri Stock 2,520,000,000
Record retirement of PT Hidrologi Kimia stock and
distribution of PT Integrasi Industri stock:
Rp592,500,000 = Rp600,000,000 - Rp7,500,000
Rp495,500 = Rp500,000 - Rp4,500
1,410,000,000 = Rp220,100,000 + Rp1,189,900,000
*Alternative approaches exist.
1 - 36

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INTERCORPORATE ACQUISITIONS AND INVESTMENTS IN OTHER ENTITIES

Q1-1 Complex organizational structures often result when companies do business in a

Solutions Manual Adaptasi Baker / Lembke / King / Jeffrey,

Solutions Manual Adaptasi Baker / Lembke / King / Jeffrey,

Q1-15 Additional paid-in capital reported following a business combination recorded as a

Solutions Manual Adaptasi Baker / Lembke / King / Jeffrey,

C1-1 Reporting Alternatives and International Harmonization

b. Indonesian companies must be concerned about accounting standards in other countries

C1-2 Assignment of Acquisition Costs

To: Vice-President of Finance

Re: Recording Acquisition Costs of Business Combination

PT Pusaka incurred a variety of costs in acquiring the ownership of PT Caraka and

A total of Rp720,000,000 was paid by PT Pusaka in completing its acquisition of PT Caraka.

You also requested a summary of proposed changes to the requirements established in

C1-3 Leveraged Buyouts

a. A leveraged buyout involves acquiring a company in a transaction or series of planned

Solutions Manual Adaptasi Baker / Lembke / King / Jeffrey,

E1-1 Multiple-Choice Questions on Complex Organizations

E1-2 Multiple-Choice Questions on Recording Business Combinations

E1-3 Multiple-Choice Questions on Reported Balances [AICPA Adapted]

Solutions Manual Adaptasi Baker / Lembke / King / Jeffrey,

E1-4 Multiple-Choice Questions Involving Account Balances

E1-5 Asset Transfer to Subsidiary

a. Journal entry recorded by PT Temaram for transfer of assets to PT Terang:

Investment in PT Terang Common Stock 408,000,000

b. Journal entry recorded by PT Terang for receipt of assets from PT Temaram:

Solutions Manual Adaptasi Baker / Lembke / King / Jeffrey,

E1-6 Creation of New Subsidiary

a. Journal entry recorded by PT Lentera for transfer of assets to PT Mahameru:

Investment in PT Mahameru Common Stock 498,000,000

b. Journal entry recorded by PT Mahameru for receipt of assets from PT Lentera:

Solutions Manual Adaptasi Baker / Lembke / King / Jeffrey,

E1-7 Balance Sheet Totals of Parent Company

Investment in PT Kelana Common Stock 66,000,000

Solutions Manual Adaptasi Baker / Lembke / King / Jeffrey,

E1-8 Stock Acquisition

Journal entry to record the purchase of PT Tenggara, shares:

Investment in PT Tenggara, Common Stock 986,000,000

Solutions Manual Adaptasi Baker / Lembke / King / Jeffrey,

E1-9 Balances Reported Following Combination

a. Stock Outstanding: Rp200,000,000 + (Rp10,000 x 8,000 shares) Rp280,000,000

b. Cash and Receivables: Rp150,000,000 + Rp40,000,000 190,000,000

c. Land: Rp100,000,000 + Rp85,000,000 185,000,000

d. Buildings and Equipment (net): Rp300,000,000 + Rp230,000,000 530,000,000

e. Goodwill: (Rp50,000 x 8,000) - Rp355,000,000 45,000,000

f. Additional Paid-In Capital:

g. Retained Earnings 330,000,000

E1-10 Goodwill Recognition

Journal entry to record acquisition of PT Sempurna net assets:

Cash and Receivables 40,000,000

Solutions Manual Adaptasi Baker / Lembke / King / Jeffrey,

E1-11 Negative Goodwill

Journal entry to record acquisition of PT Mufakat net assets:

Cash and Receivables 50,000,000

Computation of negative goodwill

Purchase price Rp564,000,000

Assignment of negative goodwill to noncurrent assets

Reduction for Assigned

*Based on relative fair values.

Solutions Manual Adaptasi Baker / Lembke / King / Jeffrey,

E1-12 Impairment of Goodwill

b. Goodwill of Rp35,000,000 will be reported (fair value of reporting unit of