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SPECIAL APPENDIX 1
1. In order to record the shares acquired at fair quired for monetary consideration. Thus, if 90%
value, the individual stockholders residual in- of the shares were acquired from noncontrolling
terest must have increased and the new resi- group stockholders, but the total monetary con-
dual interest must be under 5%; or the stock- sideration given to all former owners was 70%,
holders residual interest decreased and (a) the only 70% of the shares acquired from the for-
voting interest must be under 20%, (b) the indi- mer noncontrolling group could be recorded at
vidual supplied less than 20% of the companys fair value. The balance of the shares would be
total capital including debt, and (c) the new re- recorded at book value.
sidual interest is less than 5%, and all the for-
3. Eighty-five percent of the shares would be rec-
mer owners whose ownership interest de-
orded at fair value on the date of the acquisi-
creased must be under 20%.
tion. Generally, the remaining shares would be
Those shares not recorded at fair value are recorded at their owners simple-equity-
recorded at the simple-equity-adjusted cost of adjusted cost. There are, however, exceptions
the owner. for owners with a less than 5% interest that
would allow the shares of the continuing stock-
2. When at least 80% of the consideration given is
holders to be recorded at current fair value.
not monetary, the shares recorded at fair value
are limited to the percentage of shares ac-
SA-1
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SA1Exercises
EXERCISES
EXERCISE SA1-1
(1) 9,000 noncontrolling group shares at $40 market value* ........................... $360,000
1,000 controlling group shares at $25 equity-adjusted cost ....................... 25,000
Total cost .................................................................................................... $385,000
*80% test met: 9,000 10,000 = 90% acquired for cash.
(2) 8,000 noncontrolling group shares at $40 market value* ........................... $320,000
2,000 controlling group shares at $25 equity-adjusted cost ....................... 50,000
Total cost .................................................................................................... $370,000
*80% test met: 8,000 10,000 = 80% acquired for cash.
(3) 7,000 noncontrolling group shares at $40 market value* ........................... $280,000
2,000 noncontrolling group shares at $33 book value
($330,000 10,000 shares) ................................................................ 66,000
1,000 controlling group shares at $25 equity-adjusted cost ....................... 25,000
Total cost .................................................................................................... $371,000
*80% test not met: 7,000 10,000 = 70% acquired for cash.
SA-2
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SA1Exercises
EXERCISE SA1-2
Calculation of cost:
7,000 noncontrolling group shares at $40 market value* ........................... $280,000
2,000 noncontrolling group shares at $35 book value
($350,000 10,000 shares) ................................................................ 70,000
1,000 controlling group shares at $38 equity-adjusted cost ....................... 38,000
Total cost .................................................................................................... $388,000
*80% test not met: 7,000 10,000 = 70% acquired for cash.
Hercules Corporation
Balance Sheet
January 1, 20X1
SA-3
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SA1Problem
PROBLEM
PROBLEM SA1-1
Entries:
Cash ......................................................................................... 100,000
Common Stock ($10 par).................................................... 40,000
Paid-In Capital in Excess of Par ......................................... 60,000
To record formation of Newtone Corporation.
Cash ......................................................................................... 250,000
Bonds Payable.................................................................... 250,000
To record borrowing for the buyout.
SA-4
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SA1Problem
SA-5
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SA1Problem
Entries:
Cash ......................................................................................... 100,000
Common Stock ($10 par).................................................... 40,000
Paid-In Capital in Excess of Par ......................................... 60,000
To record formation of Newtone Corporation.
Cash ......................................................................................... 300,000
Bonds Payable.................................................................... 300,000
To record borrowing for the buyout.
Cash ......................................................................................... 60,000
Inventory ($130,000 + $20,000) ............................................... 150,000
Accounts Receivable ................................................................ 40,000
Equipment ($75,000 + $25,000) ............................................... 100,000
Building ($120,000 + $80,000) ................................................. 200,000
Land .......................................................................................... 30,000
Goodwill .................................................................................... 65,000
Bonds Payable.................................................................... 150,000
Common Stock (5,000 shares $10 par) ........................... 50,000
Paid-In Capital in Excess of Par
[($50,000 + $45,000) $50,000 par] ............................ 45,000
Cash ................................................................................... 400,000
To record the acquisition of Oldtime.
SA-6