accounting answer(2)

Chapter 5 Business Combinations

22. The balance sheet of Mongol Company on December 31, 2006, prior to its merger with

Solway Corporation, was as follows:

MONGOL COMPANY

Balance Sheet (prior to business combination)

December 31, 2006

Assets

Inventories $150,000 Plant assets (net) 500,000 Other assets 300,000 Total assets $950,000

Liabilities & Stockholders' Equity

Liabilities $450,000 Common stock, $5 par 150,000 Additional paid-in capital 150,000 Retained earnings 200,000 Total liabilities & stockholders' equity $950,000

On December 31, 2006, Solway issued 60,000 of its $10 par (current fair value $15) common stock for all the outstanding common stock of Mongol, which was then liquidated. Also on December 31, 2006, Solway paid $60,000 out-of-pocket costs in connection with the business combination, of which $25,000 were finder's, accounting, and legal fees directly related to the combination, and $35,000 were costs of registering and issuing the common stock to effect the combination. Current fair values of

Mongol's inventories and plant assets were $180,000 and $620,000, respectively; other assets and liabilities had current fair values equal to their carrying amounts.

Prepare journal entries on December 31, 2006, for Solway Corporation to record the business combination with Mongol Company. Disregard income taxes.

62 Larsen, Modern Advanced Accounting, Tenth Edition

Chapter 5 Business Combinations

Answer:

Investment in Mongol Company Common Stock (60,000 x $15) Common Stock (60,000 x $10) Paid-In Capital in Excess of Par To record merger with Mongol Company.

900,000

600,000 300,000

Investment in Mongol Company Common Stock 25,000 Paid-in Capital in Excess of Par 35,000 Cash

To record payment of out-of-pocket costs incurred in merger with Mongol Company.

60,000

Inventories 180,000 Plant Assets (net) 620,000 Other Assets 300,000 Goodwill ($925,000 – $650,000) 275,000 Liabilities 450,000 Investment in Mongol Company Common Stock 925,000 To allocate cost of Mongol Company investment to identifiable assets and liabilities, with the remainder to goodwill.

23. The balance sheet of Mintmore Company on September 30, 2006, with related current

fair values for assets and liabilities, is shown as follows:

MINTMORE COMPANY

Balance Sheet (prior to business combination)

September 30, 2006

Carrying Current Assets Amounts Fair Values Current assets $ 500,000 $ 580,000 Plant assets (net) 1,000,000 1,150,000 Other assets 300,000 360,000 Total assets $1,800,000 Liabilities & Stockholders' Equity Current liabilities $ 300,000 $ 300,000 Long-term debt 400,000 370,000 Common stock, $1 par 500,000 Additional paid-in capital 200,000 Retained earnings 400,000 Total liabilities & stockholders' equity $1,800,000

Larsen, Modern Advanced Accounting, Tenth Edition 63

Chapter 5 Business Combinations

On September 30, 2006, Spooner Corporation paid $1,560,000 to Mintmore Company for all the Mintmore assets except its cash of $50,000, and assumed all liabilities of Mintmore, in a business combination that had been approved by the boards of directors and stockholders of both companies. Also on September 30, 2006, Spooner paid legal fees of $20,000 incurred to implement the business combination.

Prepare journal entries for Spooner Corporation on September 30, 2006, to record the business combination with Mintmore Company. Disregard income taxes. Answer:

Investment in Net Assets of Mintmore Company 1,560,000 Cash

To record acquisition of net assets of Mintmore Company except cash.

Investment in Net Assets of Mintmore Company 20,000 Cash

To record payment of legal fees in connection with acquisition Of net assets of Mintmore Company.

Current Assets ($580,000 – $50,000) 530,000 Plant Assets (net) 1,150,000 Other Assets 360,000 Discount on Long-Term Debt 30,000 Goodwill ($1,580,000 – $1,370,000) 210,000 Current Liabilities Long-Term Debt Investment in Net Assets of Mintmore Company To allocate cost of net assets acquired to identifiable net assets, with remainder to goodwill.

1,560,000

20,000

300,000 400,000 1,580,000

64 Larsen, Modern Advanced Accounting, Tenth Edition

Chapter 5 Business Combinations

24. On May 31, 2006, Combinor Corporation issued $4,000,000 face amount of 20-year,

16% bonds to yield 20%, interest payable each May 31 and November 30, for all the net assets of Combinee Company. Also on May 31, 2006, Combinor paid the following out-of-pocket costs in connection with the combination:

Finder's, accounting, and legal fees relating to combination $180,000 Cost associated with SEC registration statement 120,000 Total out-of-pocket costs of business combination $300,000

The separate balance sheet of Combinee on May 31, 2006, prior to the business combination included the following:

Carrying Current Amounts Fair Values

Cash $ 50,000 $ 50,000 Other current assets 650,000 780,000 Investments in marketable debt securities (held to maturity) 400,000 460,000 Plant assets (net) 940,000 2,060,000 Total assets $2,040,000 $3,350,000 Current liabilities $ 300,000 $ 300,000 Long-term debt 200,000 200,000 Total liabilities $ 500,000 $ 500,000

Common stock 1,000,000 Retained earnings 540,000 Total liabilities & stockholders' equity $2,040,000

Prepare journal entries for Combinor Corporation on May 31, 2006, to record the business combination with Combinee Company. Appropriate present value factors are as follows:

Present value of 1 due in 40 periods at 10% 0.022095 Present value of ordinary annuity of 1 for 40 periods at 10% 9.779051

Larsen, Modern Advanced Accounting, Tenth Edition 65

Chapter 5 Business Combinations

Answer:

Investment in Net Assets of Combinee Company Discount on Bonds Payable ($4,000,000 – $3,217,676) Bonds Payable

To record acquisition of net assets of Combinee

Company for 20-year, 16% bonds yielding 20%, in a business combination. Present value of bonds:

($4,000,000 x 0.022095) + ($320,000 x 9.779051) = $3,217,676.

3,217,676 782,324

4,000,000

Investment in Net Assets of Combinee Company Bond Issue Costs Cash

To record payment of out-of-pocket costs incurred in acquisition of net assets of Combinee Company.

180,000 120,000

300,000

Cash

Other Current Assets

Investment in Marketable Debt Securities Plant Assets (net) Goodwill Current Liabilities Long-Term Debt Investment in Net Assets of Combinee Company To allocate cost of net assets acquired to identifiable net assets, with remainder to goodwill.

50,000 780,000 460,000 2,060,000 547,676

300,000 200,000 3,397,676

66 Larsen, Modern Advanced Accounting, Tenth Edition

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