Chapter 2, Problem 36APA

On February 1, Piscina Corporation completed a combination with Swimwear Company. At that date, Swimwear’s account balances were as follows:

	Book Values	Fair Values
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$ 600,000	$ 650,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	450,000	750,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	900,000	1,000,000
Unpatented technology . . . . . . . . . . . . . . . . . . . . . . . . . .	–0–	1,500,000
Common stock ($10 par value) . . . . . . . . . . . . . . . . . . . .	(750,000)
Retained earnings, 1/1 . . . . . . . . . . . . . . . . . . . . . . . . . . .	(1,100,000)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(600,000)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	500,000

Piscina issued 30,000 shares of its common stock with a par value of $25 and a fair value of $150 per share to the owners of Swimwear for all of their Swimwear shares. Upon completion of the combination, Swimwear Company was formally dissolved.

Prior to 2002, business combinations were accounted for using either purchase or pooling of interests accounting. The two methods often produced substantially different financial statement effects. For the scenario above,

1. a. What are the respective consolidated values for Swimwear’s assets under the pooling method and the purchase method?
2. b. Under each of the following methods, how would Piscina account for Swimwear’s current year, but prior to acquisition, revenues and expenses?

• Pooling of interests method.
• Purchase method.

1. c. Explain the alternative impact of pooling versus purchase accounting on performance ratios such as return on assets and earnings per share in periods subsequent to the combination.