Chapter 1, Problem 1.39P

a

To determine

Introduction: Accounting for business combination uses two methods, the purchase method and the pooling of interests method, but now all business combinations must use the acquisition method, many companies financial statements will continue to include the effects of previous business combinations.

Requirement 1

The number of outstanding shares did S have on its $5 par value shares.

Answer to Problem 1.39P

14,000 shares

Explanation of Solution

Book value of common stock held by S $70,000

Par value of shares $5

Number of shares at par value $5: $14,000\mathrm{s}\mathrm{h}\mathrm{a}\mathrm{r}\mathrm{e}\mathrm{s}=\mathrm{\$}70,000/\mathrm{\$}5$

b.

To determine

Introduction: Accounting for business combination uses two methods, the purchase method and the pooling of interests method, but now all business combinations must use the acquisition method, many companies financial statements will continue to include the effects of previous business combinations.

Requirement 2

The price per share received at the time of issue, assuming that all share were issued.

Answer to Problem 1.39P

Price per share $8.00

Explanation of Solution

Given Common stock value $70,000

Additional paid in capital $42,000

Number of shares 14,000 shares

  $\text{Price}\text{per}\text{share}\text{=}\frac{\text{Total}\text{Paid}\text{up}\text{capital}}{\text{Number}\text{of}\text{Share}}$

  $\begin{array}{l}\text{Price}\text{per}\text{share}\text{=}\frac{\text{\$70,000}\text{+}\text{\$42,000}}{\text{14,000}}\\ =\mathrm{\$}8.00\end{array}$

c.

To determine

Introduction: Accounting for business combination uses two methods, the purchase method and the pooling of interests method, but now all business combinations must use the acquisition method, many companies financial statements will continue to include the effects of previous business combinations.

Requirement 3

The number of shares P issued at the date of combination

Answer to Problem 1.39P

Number of shares issued at the date of combination 7,000 shares

Explanation of Solution

Given value of common stock of combined entity $117,000

Common stocks of P before combination $96,000

  $\begin{array}{c}\text{Number of shares issued at the date of combination}=\left(\mathrm{\$}117,000-\mathrm{\$}96,000\right)/\mathrm{\$}3\\ =7,000\mathrm{s}\mathrm{h}\mathrm{a}\mathrm{r}\mathrm{e}\mathrm{s}\end{array}$

d.

To determine

Introduction: Accounting for business combination uses two methods, the purchase method and the pooling of interests method, but now all business combinations must use the acquisition method, many companies financial statements will continue to include the effects of previous business combinations.

Requirement 4

The amount of cash did P pay as stock issue.

Answer to Problem 1.39P

The amount of cash P paid $24,000.

Explanation of Solution

Given

P’s cash balance $65,000

S’s cash balance $15,000

Combined cash balance $56,000

  $\begin{array}{c}\text{Cash paid by P}=\mathrm{\$}65,000+\mathrm{\$}15,000-\mathrm{\$}56,000\\ =\mathrm{\$}24,000\end{array}$

e.

To determine

Introduction: Accounting for business combination uses two methods, the purchase method and the pooling of interests method, but now all business combinations must use the acquisition method, many companies financial statements will continue to include the effects of previous business combinations.

Requirement 5

The market value of P’s shares issued at the date of combination

Answer to Problem 1.39P

Market value of P’s shares $364,000.

Explanation of Solution

Given Stockholders’ equity of P: Common stock $96,000, Additional paid in capital $234,000

Cash paid by P $24,000

Stockholders’ equity of combined entity: common stock $117,000, Additional paid in capital $553,000

  $\begin{array}{l}\text{Value of P’s shares at the date of combination: }\\ \text{\$364,000 =}\left(\text{\$117,000 + \$553,000 + \$24,000}\right)\text{–}\left(\text{\$96,000 + \$234,000}\right)\end{array}$

f.

To determine

Introduction: Accounting for business combination uses two methods, the purchase method and the pooling of interests method, but now all business combinations must use the acquisition method, many companies financial statements will continue to include the effects of previous business combinations.

Requirement 6

The fair value of S’s inventory at the date of combination

Answer to Problem 1.39P

The fair value of S’s inventory $110,000

Explanation of Solution

Given inventory of P before combination $210,000

Inventory of combined entity $320,000

  $\text{Fair value of inventory: }\mathrm{\$}110,000=\mathrm{\$}320,000-\mathrm{\$}210,000$

g.

To determine

Introduction: Accounting for business combination uses two methods, the purchase method and the pooling of interests method, but now all business combinations must use the acquisition method, many companies financial statements will continue to include the effects of previous business combinations.

Requirement 7

The fair value of S’s net assets at the date of combination

Answer to Problem 1.39P

The fair value of S’s net assets $306,000.

Explanation of Solution

Given:

Fair value of assets: Cash $15,000, Accounts receivable $30,000, Inventory $110,000, Building and equipment $293,000. Accounts payable $22,000, Bonds payable $120,000

  $\begin{array}{l}\text{Fair value of assets: }\\ \mathrm{\$}306,000=\left(\mathrm{\$}15,000+\mathrm{\$}30,000+\mathrm{\$}110,000+\mathrm{\$}293,000\right)–\left(\mathrm{\$}22,000+\mathrm{\$}120,000\right)\end{array}$

h

To determine

Introduction: Accounting for business combination uses two methods, the purchase method and the pooling of interests method, but now all business combinations must use the acquisition method, many companies financial statements will continue to include the effects of previous business combinations.

Requirement 8

The amount of goodwill if any will be reported in combined balance sheet.

Answer to Problem 1.39P

The amount of goodwill $58,000

Explanation of Solution

  $\begin{array}{l}\text{Fair value of assets: }\\ \mathrm{\$}306,000=\left(\mathrm{\$}15,000+\mathrm{\$}30,000+\mathrm{\$}110,000+\mathrm{\$}293,000\right)–\left(\mathrm{\$}22,000+\mathrm{\$}120,000\right)\end{array}$

Market value of shares $364,000

  $\text{Goodwill: }\mathrm{\$}58,000=\mathrm{\$}364,000-\mathrm{\$}306,000$