The document provides information about business combinations, including definitions and examples. It discusses how a business combination occurs when two or more previously separate companies come under single control. It also describes how goodwill arises in a business combination when the cost exceeds the fair value of identifiable net assets acquired. The document provides answers to questions about different types of business combinations and how they are accounted for.

1. Chapter 1
BUSINESS COMBINATIONS
Answers to Questions
1 A business combination is a union of business entities in which two or more previously separate and
independent companies are brought under the control of a single management team. FASB Statement No.
141R describes three situations that establish the control necessary for a business combination, namely,
when one or more corporations become subsidiaries, when one company transfers its net assets to another,
and when each combining company transfers its net assets to a newly formed corporation.
2 The dissolution of all but one of the separate legal entities is not necessary for a business combination. An
example of one form of business combination in which the separate legal entities are not dissolved is when
one corporation becomes a subsidiary of another. In the case of a parent-subsidiary relationship, each
combining company continues to exist as a separate legal entity even though both companies are under the
control of a single management team.
3 A business combination occurs when two or more previously separate and independent companies are
brought under the control of a single management team. Merger and consolidation in a generic sense are
frequently used as synonyms for the term business combination. In a technical sense, however, a merger is
a type of business combination in which all but one of the combining entities are dissolved and a
consolidation is a type of business combination in which a new corporation is formed to take over the
assets of two or more previously separate companies and all of the combining companies are dissolved.
4 Goodwill arises in a business combination accounted for under the acquisition method when the cost of
the investment (fair value of the consideration transferred) exceeds the fair value of identifiable net assets
acquired. Under FASB Statement No. 142, goodwill is no longer amortized for financial reporting
purposes and will have no effect on net income, unless the goodwill is deemed to be impaired. If goodwill
is impaired, a loss will be reocnized.
5 A bargain purchase occurs when the acquisition price is less than the fair value of the identifiable net
assets acquired. The acquirer records the gain from a bargain purchase amount as an extraordinary gain
during the period of the acquisition, under FASB Statement No. 141R.
©2009 Pearson Education, Inc. publishing as Prentice Hall
1-1

2. 1-2 Business Combinations
SOLUTIONS TO EXERCISES
Solution E1-1
1 a
2 b
3 a
4 a
5 d
Solution E1-2 [AICPA adapted]
1 a
Plant and equipment should be recorded at the $55,000 fair value.
2 c
Investment cost $800,000
Less: Fair value of net assets
Cash $ 80,000
Inventory 190,000
Property and equipment — net 560,000
Liabilities (180,000) 650,000
Goodwill $150,000
Solution E1-3
Stockholders’ equity — Pillow Corporation on January 3
Capital stock, $10 par, 300,000 shares outstanding $3,000,000
Additional paid-in capital
[$200,000 + $1,500,000 – $5,000] 1,695,000
Retained earnings 600,000
Total stockholders’ equity $5,295,000
Entry to record combination
Investment in Sleep-bank 3,000,000
Capital stock, $10 par 1,500,000
Additional paid-in capital 1,500,000
Investment expense 10,000
Additional paid-in capital 5,000
Cash 15,000
Check: Net assets per books $3,800,000
Goodwill 1,510,000
Less: Expense of direct costs (10,000)
Less: Issuance of stock (5,000)
$5,295,000
©2009 Pearson Education, Inc. publishing as Prentice Hall

3. Chapter 1 1-3
©2009 Pearson Education, Inc. publishing as Prentice Hall

4. 1-4 Business Combinations
Solution E1-4
Journal entries on IceAge’s books to record the acquisition
Investment in Jester 2,550,000
Common stock, $10 par 1,200,000
Additional paid-in capital 1,350,000
To record issuance of 120,000 shares of $10 par common stock with a fair
value of $2,550,000 for the common stock of Jester in a business
combination.
Additional paid-in capital 15,000
Investment expenses 45,000
Other assets 60,000
To record costs of registering and issuing securities as a reduction of paid-
in capital, and record direct and indirect costs of combination as
expenses.
Current assets 1,100,000
Plant assets 2,200,000
Liabilities 300,000
Investment in Jester 3,000,000
To record allocation of the $2,550,000 cost of Jester Company to identifiable
assets and liabilities according to their fair values, computed as
follows:
Cost $2,550,000
Fair value acquired 3,000,000
Bargain purchase amount $ 450,000
Investment in Jester 450,000
Gain from bargain purchase 450,000
To record gain from bargain purchase.
©2009 Pearson Education, Inc. publishing as Prentice Hall

5. Chapter 1 1-5
Solution E1-5
Journal entries on the books of Danders Corporation to record merger with
Harrison Corporation
Investment in Harrison 530,000
Common stock, $10 par 180,000
Additional paid-in capital 150,000
Cash 200,000
To record issuance of 18,000 common shares and payment of cash in the
acquisition of Harrison Corporation in a merger.
Investment expenses 70,000
Additional paid-in capital 30,000
Cash 100,000
To record costs of registering and issuing securities and additional
direct costs of combination.
Cash 40,000
Inventories 100,000
Other current assets 20,000
Plant assets — net 280,000
Goodwill 160,000
Current liabilities 30,000
Other liabilities 40,000
Investment in Harrison 530,000
To record allocation of cost to assets received and liabilities assumed
on the basis of their fair values and to goodwill computed as follows:
Cost of investment $530,000
Fair value of assets acquired 370,000
Goodwill $160,000
©2009 Pearson Education, Inc. publishing as Prentice Hall

6. 1-6 Business Combinations
SOLUTIONS TO PROBLEMS
Solution P1-1
Preliminary computations
Fair Value: Cost of investment in Sain at January 2
(30,000 shares × $20) $600,000
Book value (440,000)
Excess fair value over book value $160,000
Excess allocated to:
Current assets $ 40,000
Remainder to goodwill 120,000
Excess fair value over book value $160,000
Note: $25,000 direct costs of combination are expensed. The
excess fair value of Pine’s buildings is not considered.
Pine Corporation
Balance Sheet at January 2, 2009
Assets
Current assets
($130,000 + $60,000 + $40,000 excess - $40,000 direct costs) $ 190,000
Land ($50,000 + $100,000) 150,000
Buildings — net ($300,000 + $100,000) 400,000
Equipment — net ($220,000 + $240,000) 460,000
Goodwill 120,000
Total assets $1,320,000
Liabilities and Stockholders’ Equity
Current liabilities ($50,000 + $60,000) $ 110,000
Common stock, $10 par ($500,000 + $300,000) 800,000
Additional paid-in capital
[$50,000 + ($10 × 30,000 shares) — $15,000 costs of issuing 335,000
and registering securities]
Retained earnings (subtract $25,000 expensed direct cost) 75,000
Total liabilities and stockholders’ equity $1,320,000
©2009 Pearson Education, Inc. publishing as Prentice Hall

7. Chapter 1 1-7
Solution P1-2
Preliminary computations
Fair Value: Cost of acquiring Seabird $825,000
Fair value of assets acquired and liabilities assumed 670,000
Goodwill from acquisition of Seabird $155,000
Pelican Corporation
Balance Sheet
at January 2, 2009
Assets
Current assets
Cash [$150,000 + $30,000 - $140,000 expenses paid] $ 40,000
Accounts receivable — net [$230,000 + $40,000 fair value] 270,000
Inventories [$520,000 + $120,000 fair value] 640,000
Plant assets
Land [$400,000 + $150,000 fair value] 550,000
Buildings — net [$1,000,000 + $300,000 fair value] 1,300,000
Equipment — net [$500,000 + $250,000 fair value] 750,000
Goodwill 155,000
Total assets $3,705,000
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable [$300,000 + $40,000] $ 340,000
Note payable [$600,000 + $180,000 fair value] 780,000
Stockholders’ equity
Capital stock, $10 par [$800,000 + (33,000 shares × $10)] 1,130,000
Other paid-in capital
[$600,000 - $40,000 + ($825,000 - $330,000)] 1,055,000
Retained earnings (subtract $100,000 expensed direct costs) 400,000
Total liabilities and stockholders’ equity $3,705,000
©2009 Pearson Education, Inc. publishing as Prentice Hall

8. 1-8 Business Combinations
Solution P1-3
Persis issues 25,000 shares of stock for Sineco’s outstanding shares
1a Investment in Sineco 750,000
Capital stock, $10 par 250,000
Other paid-in capital 500,000
To record issuance of 25,000, $10 par shares with a market price
of $30 per share in a business combination with Sineco.
Investment expenses 30,000
Other paid-in capital 20,000
Cash 50,000
To record costs of combination in a business combination with
Sineco.
Cash 10,000
Inventories 60,000
Other current assets 100,000
Land 100,000
Plant and equipment — net 350,000
Goodwill 180,000
Liabilities 50,000
Investment in Sineco 750,000
To record allocation of investment cost to identifiable assets
and liabilities according to their fair values and the remainder
to goodwill. Goodwill is computed: $750,000 cost - $570,000 fair
value of net assets acquired.
1b Persis Corporation
Balance Sheet
January 2, 2009
(after business combination)
Assets
Cash [$70,000 + $10,000] $ 80,000
Inventories [$50,000 + $60,000] 110,000
Other current assets [$100,000 + $100,000] 200,000
Land [$80,000 + $100,000] 180,000
Plant and equipment — net [$650,000 + $350,000] 1,000,000
Goodwill 160,000
Total assets $1,750,000
Liabilities and Stockholders’ Equity
Liabilities [$200,000 + $50,000] $ 250,000
Capital stock, $10 par [$500,000 + $250,000] 750,000
Other paid-in capital [$200,000 + $500,000 - $20,000] 680,000
Retained earnings (subtract $30,000 direct costs) 70,000
Total liabilities and stockholders’ equity $1,750,000
©2009 Pearson Education, Inc. publishing as Prentice Hall

9. Chapter 1 1-9
Solution P1-3 (continued)
Persis issues 15,000 shares of stock for Sineco’s outstanding shares
2a Investment in Sineco (15,000 shares × $30) 450,000
Capital stock, $10 par 150,000
Other paid-in capital 300,000
To record issuance of 15,000, $10 par common shares with a market
price of $30 per share.
Investment expense 30,000
Other paid-in capital 20,000
Cash 50,000
To record costs of combination in the acquisition of Sineco.
Cash 10,000
Inventories 60,000
Other current assets 100,000
Land 100,000
Plant and equipment — net 350,000
Liabilities 50,000
Investment in Sineco 570,000
To record Sineco’s net assets at fair values.
Investment in Sineco 120,000
Gain on bargain purchase 120,000
To record gain on bargain purchase and adjust Investment in
Sineco to reflect total fair value.
Fair value of net assets acquired $570,000
Investment cost (Fair value of consideration) 450,000
Gain on Bargain Purchase $120,000
2b Persis Corporation
Balance Sheet
January 2, 2009
(after business combination)
Assets
Cash [$70,000 + $10,000] $ 80,000
Inventories [$50,000 + $60,000] 110,000
Other current assets [$100,000 + $100,000] 200,000
Land [$80,000 + $100,000] 180,000
Plant and equipment — net [$650,000 + $350,000] 1,000,000
Total assets $1,570,000
Liabilities and stockholders’ equity
Liabilities [$200,000 + $50,000] $ 250,000
Capital stock, $10 par [$500,000 + $150,000] 650,000
Other paid-in capital [$200,000 + $300,000 - $20,000] 480,000
Retained earnings (subtract $30,000 direct costs 190,000
and add $120,000 Gain from bargain purchase)
Total liabilities and stockholders’ equity $1,570,000
©2009 Pearson Education, Inc. publishing as Prentice Hall

10. 1-10 Business Combinations
Solution P1-4
1 Schedule to allocate investment cost to assets and liabilities
Investment cost (fair value), January 1 $300,000
Fair value acquired from Sen ($360,000 × 100%) 360,000
Excess fair value over cost (bargain purchase gain) $ 60,000
Allocation:
Allocation
Cash $ 10,000
Receivables — net 20,000
Inventories 30,000
Land 100,000
Buildings — net 150,000
Equipment — net 150,000
Accounts payable (30,000)
Other liabilities (70,000)
Gain on bargain purchase (60,000)
Totals $ 300,000
2 Phule Corporation
Balance Sheet
at January 1, 2009
(after combination)
Assets Liabilities
Cash $ 25,000 Accounts payable $ 120,000
Receivables — net 60,000 Note payable (5 years) 200,000
Inventories 150,000 Other liabilities 170,000
Land 145,000 Liabilities 490,000
Buildings — net 350,000
Equipment — net 330,000 Stockholders’ Equity
Capital stock, $10 par 300,000
Other paid-in capital 100,000
Retained earnings* 170,000
Stockholders’ equity 510,000
Total assets $1,060,000 Total equities $1,060,000
* Retained earnings reflects the $60,000 gain on the bargain purchase.
©2009 Pearson Education, Inc. publishing as Prentice Hall

11. Chapter 1 1-11
Solution P1-5
1 Journal entries to record the acquisition of Dawn Corporation
Investment in Dawn 2,500,000
Capital stock, $10 par 1,000,000
Other paid-in capital 1,000,000
Cash 500,000
To record acquisition of Dawn for 100,000 shares of common stock
and $500,000 cash.
Investment expense 100,000
Other paid-in capital 50,000
Cash 150,000
To record payment of costs to register and issue the shares of
stock ($50,000) and other costs of combination ($100,000).
Cash 240,000
Accounts receivable 360,000
Notes receivable 300,000
Inventories 500,000
Other current assets 200,000
Land 200,000
Buildings 1,200,000
Equipment 600,000
Accounts payable 300,000
Mortgage payable, 10% 600,000
Investment in Dawn 2,700,000
To record the net assets of Dawn at fair value.
Investment in Dawn 200,000
Gain on bargain purchase 200,000
To adjust Investment account to total fair value and recognize
the gain from the bargain purchase.
Gain on Bargain Purchase Calculation
Acquisition price $2,500,000
Fair value of net assets acquired 2,700,000
Gain on bargain purchase $ 200,000
©2009 Pearson Education, Inc. publishing as Prentice Hall

12. 1-12 Business Combinations
Solution P1-5 (continued)
2 Celistia Corporation
Balance Sheet
at January 2, 2009
(after business combination)
Assets
Current Assets
Cash $ 2,590,000
Accounts receivable — net 1,660,000
Notes receivable — net 1,800,000
Inventories 3,000,000
Other current assets 900,000 $ 9,950,000
Plant Assets
Land $ 2,200,000
Buildings — net 10,200,000
Equipment — net 10,600,000 23,000,000
Total assets $32,950,000
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable $ 1,300,000
Mortgage payable, 10% 5,600,000 $ 6,900,000
Stockholders’ Equity
Capital stock, $10 par $11,000,000
Other paid-in capital 8,950,000
Retained earnings* 6,000,000 26,050,000
Total liabilities and stockholders’ equity $32,950,000
* Subtract $100,000 direct combination costs and add $200,000 gain on bargain
purchase.
©2009 Pearson Education, Inc. publishing as Prentice Hall

13. Chapter 1 1-13
RESEARCH CASE
1. Journal entry to record the acquisition (in millions of $)
Investment in Target 50,000
Common stock, $0.10 par 100
Additional paid-in capital 49,900
To record acquisition of Target for 1 billion shares of common
stock having a fair value of $50 per share.
Cash 240,000
Accounts receivable 360,000
Notes receivable 300,000
Inventories 500,000
Other current assets 200,000
Land 190,000
Buildings 1,140,000
Equipment 570,000
Accounts payable 300,000
Mortgage payable, 10% 600,000
Investment in Target 2,600,000
Assign the excess of fair value over book value of assets and
liabilities as shown in the following allocation schedule:
Acquisition price $50,000
Excess fair value of assets acquired
Inventory (10%) 625
Land (20%) 987
Buildings and improvements (20%) 3,222
Fixtures and equipment (20%) 711
Computer hardware and software (20%) 438
21,859
Goodwill $ 28,141
©2009 Pearson Education, Inc. publishing as Prentice Hall

14. 1-14 Business Combinations
2. Consolidated Balance Sheet at January 31, 2007
WAL- CONSOL
(millions, exce pt footnot e s) MART TARGET DR CR I-DATED
Ass e t s
Cash and cash equivale nt s 7,373 813 8,186
Accounts receiva ble, net 2,840 6,194 9,034
Inventor y 33,685 6,254 625 40,564
Other curre nt asse t s 2,690 1,445 4,135
Total curre nt asse ts 46,588 14,706 61,294
Proper ty and equipm e n t
Land 18,612 4,934 987 24,533
Buildings and improve m e n t s 64,052 16,110 3,222 83,384
Fixtur e s and equip me n t 25,168 3,553 711 29,432
Comput e r hardw a r e and softwar e 2,188 438 2,626
Construc tion- in-progr e s s 1,596 1,596
Transpor t a tion equip me n t 1,966 1,966
Accumula t e d depr e cia tion (24,408) (6,950) (31,358)
Proper ty and equipm e n t, net 85,390 21,431 106,821
Proper ty Under Capital Lease 5,392 5,392
Less: Accumula t e d amortiza tion (2,342) (2,342)
Proper ty Under Lease - net 3,050 3,050
28,14
Goodwill 13,759 1 41,900
50,00
Invest m e n t in Targe t 50,000 0 0
Other non- curre nt asse ts 2,406 1,212 3,618
Total as s e t s 20 1 , 1 9 3 37, 3 4 9 23 8 , 5 4 2
Liabiliti e s an d sh ar e h o l d e r s '
inv e s t m e n t
Comme r cial Paper 2,570 2,570
Accounts paya ble 28,090 6,575 34,665
Accrue d and other curre nt liabilities 14,675 2,758 17,433
Income taxe s paya ble 706 422 1,128
Current portion of long- ter m debt and note s paya ble 5,428 1,362 6,790
Current obligations capital lease s 285 285
Total curre nt liabilities 51,754 11,117 62,871
Long- ter m debt 27,222 8,675 35,897
Long ter m capital lease s 3,513 3,513
Deferre d income taxe s 4,971 577 5,548
Noncontr olling Intere s t 2,160 2,160
Other non- curre nt liabilities 1,347 1,347
Share h old e r s' invest m e n t
Common stock 513 72 72 513
Additional paid- in-capital 52,734 2,387 2,387 52,734
Retaine d earnings 55,818 13,417 13,417 55,818
Accumula t e d other compr e h e n sive income (loss) 2,508 (243) 2,265
Total shar e h olde r s' invest m e n t 111,573 15,633 127,206
©2009 Pearson Education, Inc. publishing as Prentice Hall

15. Chapter 1 1-15
50, 0
Total liabiliti e s an d sh ar e h o l d e r s ' inv e s t m e n t 20 1 , 1 9 3 37 , 3 4 9 50, 0 0 0 00 23 8 , 5 4 2
©2009 Pearson Education, Inc. publishing as Prentice Hall