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Chapter 1
Q1-7* Under pooling of interests accounting, the book values of the acquired company
were carried forward rather than being revalued to fair values that often were higher than
book values, thereby avoiding increased depreciation charges on revalued fixed assets.
During most of the time pooling accounting was acceptable, goodwill was required to be
amortized, and, because no goodwill was recognized under pooling, those amortization
charges were avoided. The carrying forward of retained earnings of all combining companies
may, in some cases, have given management increased flexibility with respect to dividends.
Operating results of the combining companies were combined for the full year in which the
combination occurred, not just from the point of combination, resulting in more favorable
reported results in the year of the business combination. The pooling method hides the value
of the consideration given, shielding management from stockholder criticism in those cases
where management paid an excessive amount for the company acquired.
Q1-8* Purchase accounting normally results in increased dollar amounts reported in the
balance sheet. Recognition of the fair values of identifiable assets and liabilities acquired
typically results in larger dollar amounts being reported. In addition, goodwill is recorded as
an asset under purchase accounting, but not recognized in a pooling. Because retained
earnings are not carried forward in a purchase, retained earnings typically is lower; however,
recognition of the fair value of shares issued typically results in larger paid-in capital account
balances. Increased depreciation charges and the amortization or impairment of goodwill
generally result in lower reported net income when purchase treatment is used.
Q1-9 Goodwill arises when purchase accounting is used and the fair value of the
compensation given to acquire another company is greater than the fair value of its
identifiable net assets. Goodwill is recorded on the books of the acquiring company when the
net assets of the acquired company are transferred to the acquiring company and recorded
on the acquiring company's books. When the acquired company is operated as a separate
entity, the amount paid by the purchaser is included in the investment account and goodwill,
as such, is not recorded on the books of either company. In this case, goodwill is only
reported when the investment account of the parent is eliminated in the consolidation
process.
Q1-10 The purchase of a company is viewed in the same way as any other purchase of
assets. The acquired company is owned by the acquiring company only for the portion of the
year subsequent to the combination. Therefore, earnings are accrued only from the date of
purchase forward.
Q1-11 None of the retained earnings of the subsidiary should be carried forward under
purchase treatment. Thus, consolidated retained earnings is limited to the balance reported
by the acquiring company.
Q1-12 Some companies have attempted to establish the corporate name as a symbol of
quality or product availability. An acquiring company may be fearful that customers will be
lost if the company is liquidated. Debt covenants are likely to require repayment of virtually all
existing debt if the acquired company is liquidated. The cost of issuing new debt may be
prohibitive. A parent-subsidiary relationship may be the only feasible means of proceeding if
it is impossible to acquire 100 percent ownership of an acquired company. When the
acquiring company does not plan to retain all operations of the acquired company, it may be
easier to dispose of the portions not wanted by leaving them in the existing corporate shell
and later disposing of the ownership of the company.
Chapter 1
Q1-13 Negative goodwill is said to exist when a purchaser pays less than the fair value of
the identifiable net assets of another company in acquiring its ownership. This difference
normally is treated as a pro rata reduction of all of the acquired assets other than cash and
cash equivalents, trade receivables, inventory, financial instruments that are required by U.S.
generally accepted accounting principles (GAAP) to be carried on the balance sheet at fair
value, assets to be disposed of by sale, and deferred tax assets.
Q1-14 If the fair value of a reporting unit acquired in a business combination exceeds its
carrying amount, the goodwill of that reporting unit is considered unimpaired. On the other
hand, if the carrying amount of the reporting unit exceeds its fair value, impairment of
goodwill must be recognized if the carrying amount of the goodwill assigned to the reporting
unit is greater than the implied value of the carrying units goodwill. The implied value of the
reporting units goodwill is determined as the excess of the fair value of the reporting unit
over the fair value of its net assets excluding goodwill.
Q1-15 Additional paid-in capital reported following a business combination recorded as a
purchase is the amount previously reported on the acquiring company's books plus the
excess of the fair value over the par or stated value of any shares issued by the acquiring
company in completing the acquisition.
Q1-16 A purchase is treated prospectively. None of the financial statement data of the
acquired company is included along with the financial statement data of the acquiring
company for periods prior to the business combination.
Q1-17 When purchase treatment is used, all costs incurred in purchasing the ownership of
another company are capitalized. These normally include items such as finder's fees, the
costs of title transfer, and legal fees associated with the purchase.
Q1-18 When the acquiring company issues shares of stock to complete a business
combination recorded as a purchase, the excess of the fair value of the stock issued over its
par value is recorded as additional paid-in capital. All costs incurred by the acquiring
company in issuing the securities should be treated as a reduction in the additional paid-in
capital. Items such as audit fees associated with the registration of securities, listing fees,
and brokers' commissions should be treated as reductions of additional paid-in capital when
stock is issued. An adjustment to bond premium or bond discount is needed when bonds are
used to complete the purchase.
Chapter 1
SOLUTIONS TO CASES
C1-1 Reporting Alternatives and International Harmonization
a. In the past, when goodwill was capitalized, Indonesian companies were required to
systematically amortize the amount recorded, thereby reducing earnings, while companies in
other countries were not required to do so. Recent changes in accounting for goodwill have
substantially eliminated this objection.
b. Indonesian companies must be concerned about accounting standards in other countries
and about international standards (i.e., those issued by the International Accounting
Standards Committee). Companies operate in a global economy today; not only do they buy
and sell products and services in other countries, but they may raise capital and have
operations located in other countries. Such companies may have to meet foreign reporting
requirements, and these requirements may differ from Indonesian reporting standards. Thus,
many Indonesian companies, and not just the largest, may find foreign and international
reporting standards relevant if they are going to operate globally.
Vice-President of Finance
PT Pusaka
From:
Re:
, Ak.
Recording Acquisition Costs of Business Combination
Chapter 1
C1-2 (continued)
While one might argue that the Rp370,000,000 was an indirect cost, it resulted directly from
the exchange of shares used to complete the business combination and should be included
in the amount assigned to the cost of acquiring ownership of PT Caraka. Of the total costs
incurred, Rp660,000,000 should be assigned to the purchase price of PT Caraka and
Rp60,000 recorded as a reduction of paid-in-capital.
You also requested a summary of proposed changes to the requirements established in
FASB 141. A report on the current status of the FASBs proposals can be found under
ABusiness Combinations: Purchase Method Procedures, at the FASB website
(www.fasb.org/project/bc_purchmethod.shtml). The current proposal will permit only those
costs related to the business combination and paid to third parties to be included as part of
the exchange transaction. All other costs will be expensed. [FASB Project Update]
Under the proposed standard, if PT Pusaka were to incur a total of Rp720,000,000 in costs
when it acquires PT Caraka, the full amount would be recorded as an expense.
Primary citation
FASB 141, Par. 24
FASB Project Update
C1-3 Leveraged Buyouts
a. A leveraged buyout involves acquiring a company in a transaction or series of planned
transactions that include using a very high proportion of debt, often secured by the assets of
the target company. Normally, the investors acquire all of the stock or assets of the target
company. A management buyout occurs when the existing management of a company
acquires all or most of the stock or assets of the company. Frequently, the investors in LBOs
include management, and thus an LBO may also be an MBO
b. The FASB has not dealt with leveraged buyouts in either current pronouncements or
exposure drafts of proposed standards. The Emerging Issues Task Force has addressed
limited aspects of accounting for LBOs. In EITF 84-23, Leveraged Buyout Holding
Company Debt, the Task Force did not reach a consensus. In EITF 88-16, Basis in
Leveraged Buyout Transactions, the Task Force did provide guidance as to the proper basis
that should be recognized for an acquiring companys interest in a target company acquired
through a leveraged buyout.
c. Whether an LBO is a type of business combination is not clear and probably depends on
the structure of the buyout. The FASB has not taken a position on whether an LBO is a type
of business combination. The EITF indicated that LBOs of the type it was considering are
similar to business combinations. Most LBOs are effected by establishing a holding
company for the purpose of acquiring the assets or stock of the target company. Such a
holding company has no substantive operations. Some would argue that a business
combination can occur only if the acquiring company has substantive operations. However,
neither the FASB nor EITF has established such a requirement. Thus, the question of
whether an LBO is a business combination is unresolved.
d. The primary issue in deciding the proper basis for an interest in a company acquired in an
LBO, as determined by EITF 88-16, is whether the transaction has resulted in a change in
Solutions Manual Adaptasi Baker / Lembke / King / Jeffrey,
Advanced Financial AccountingAn Indonesian Perspective
1-5
Chapter 1
control of the target company (a new controlling shareholder group has been established). If
a change in control has not occurred, the transaction is treated as a recapitalization or
restructuring, and a change in basis is not appropriate (the previous basis carries over). If a
change in control has occurred, a new basis of accounting may be appropriate.
Chapter 1
SOLUTIONS TO EXERCISES
E1-1 Multiple-Choice Questions on Complex Organizations
1. b
2. d
3. a
4. b
5. d
Chapter 1
408,000,000
24,000,000
36,000,000
21,000,000
37,000,000
80,000,000
240,000,000
90,000,000
21,000,000
37,000,000
80,000,000
240,000,000
90,000,000
24,000,000
36,000,000
60,000,000
348,000,000
Chapter 1
498,000,000
7,000,000
35,000,000
60,000,000
40,000,000
75,000,000
50,000,000
35,000,000
160,000,000
240,000,000
40,000,000
75,000,000
50,000,000
35,000,000
160,000,000
240,000,000
7,000,000
35,000,000
60,000,000
120,000,000
378,000,000
Chapter 1
66,000,000
28,000,000
22,000,000
15,000,000
24,000,000
9,000,000
3,000,000
65,000,000
b. Journal entry recorded by PT Kelana for receipt of assets and accounts payable from PT
Fajar:
Cash
Accounts Receivable
Inventory
Land
Depreciable Assets
Accumulated Depreciation
Accounts Payable
Common Stock
Additional Paid-In Capital
15,000,000
24,000,000
9,000,000
3,000,000
65,000,000
28,000,000
22,000,000
48,000,000
18,000,000
Chapter 1
986,000,000
425,000,000
561,000,000
Chapter 1
Rp280,000,000
190,000,000
c.
185,000,000
530,000,000
45,000,000
340,000,000
g. Retained Earnings
330,000,000
40,000,000
150,000,000
30,000,000
350,000,000
130,000,000
55,000,000
85,000,000
670,000,000
Chapter 1
50,000,000
200,000,000
91,000,00
273,000,000
16,000,000
50,000,000
580,000,000
Rp564,000,000
Rp650,000,000
(50,000,000)
600,000,000
Rp 36,000,000
Fair Value
Rp100,000,000
300,000,000
Rp400,000,000
Reduction for
Negative Goodwill*
Rp36,000,000 x
(100/400)
Rp36,000,000 x
(300/400)
Assigned
Valuation
Rp 91,000,000
273,000,000
Rp364,000,000
Chapter 1
Chapter 1
Chapter 1
Rp517,000,000
Rp624,000,000
(356,000,000)
Rp268,000,000
(40,000,000)
Rp228,000,000
120,000,000
93,000,000
(441,000,000)
Rp 76,000,000
341,000,000
Rp417,000,000
Rp327,600,000
650,800,000
Rp978,400,000
Rp218,400,000
370,000,000
(588,400,000)
Rp390,000,000
Rp25,000
15,600
Rp109,200,000
15,600
Rp
7,000
Rp390,000,000
(356,000,000)
Rp 34,000
Chapter 1
Accounts Payable
Notes Payable
Common Stock
Additional Paid-In
Capital
(250,000,000)
75,000,000 Retained Earnings
Rp1,365,000,000
Rp 240,000,000
460,000,000
840,000,000
Rp 125,000,000
235,000,000
244,000,000
556,000,000
205,000,000
Rp1,365,000,000
Computation of goodwill
Total purchase price (Rp60 x 8,000 shares)
Fair value of net identifiable assets
(Rp490,000 - Rp85,000)
Goodwill
Rp480,000,000
(405,000,000)
Rp 75,000,000
Accounts Payable
Notes Payable
Common Stock
Additional Paid-In
Capital
(250,000,000)
Retained Earnings
Rp1,269,000,000
Rp 240,000,000
460,000,000
819,000,000
Rp 125,000,000
235,000,000
244,000,000
460,000,000
205,000,000
Rp1,269,000,000
Rp240,000,000
Rp490,000,000
(85,000,000)
Rp405,000,000
(384,000,000)
(21,000,000)
Rp219,000,000
Chapter 1
54,000,000
29,000,000
83,000,000
Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Goodwill (1)
Accounts Payable
Bonds Payable
Bond Premium
Common Stock
Additional Paid-In Capital (2)
Deferred Merger Costs
Deferred Stock Issue Costs
70,000,000
110,000,000
200,000,000
100,000,000
350,000,000
84,000,000
195,000,000
100,000,000
5,000,000
320,000,000
211,000,000
54,000,000
29,000,000
Rp560,000,000
54,000,000
Rp614,000,000
Rp830,000,000
(300,000,000)
(530,000,000)
Rp84,000,000
Rp560,000,000
(320,000,000)
Rp240,000,000
(29,000,000)
Rp211,000,000
Chapter 1
E1-19 (continued)
b.
54,000,000
29,000,000
83,000,000
Cash
Accounts Receivable
Inventory
Land (3)
Buildings and Equipment (3)
Accounts Payable
Bonds Payable
Bond Premium
Preferred Stock (Rp10 x 8,000)
Additional Paid-In Capital (4)
Deferred Merger Costs
Deferred Stock Issue Costs
70,000,000
110,000,000
200,000,000
83,111,000
290,889,000
195,000,000
100,000,000
5,000,000
80,000,000
291,000,000
54,000,000
29,000,000
Rp400,000,000
54,000,000
Rp454,000,000
Rp830,000,000
(300,000,000)
(530,000,000)
Rp76,000,000
Fair Value
Rp100,000,000
350,000,000
Rp450,000,000
Reduction for
Negative Goodwill*
Rp76,000,000 x
(100/450)
Rp76,000,000 x
(350/450)
Assigned
Valuation
Rp83,111,000
290,889,000
Rp374,000,000
Rp400,000,000
(80,000,000)
Rp320,000,000
(29,000,000)
Rp291,000,000
Net income
Earnings per share
=
=
20X1:
Net income
Chapter 1
Chapter 1
SOLUTIONS TO PROBLEMS
P1-21 Assets and Accounts Payable Transferred to Subsidiary
a. Journal entry recorded by PT Tabanan for its transfer of
assets and accounts payable to PT Catur:
Investment in PT Catur Common Stock
Accounts Payable
Accumulated Depreciation Buildings
Accumulated Depreciation Equipment
Cash
Inventory
Land
Buildings
Equipment
320,000,000
45,000,000
40,000,000
10,000,000
25,000,000
70,000,000
60,000,000
170,000,000
90,000,000
25,000,000
70,000,000
60,000,000
170,000,000
90,000,000
45,000,000
40,000,000
10,000,000
180,000,000
140,000,000
Chapter 1
400,000,000
5,000,000
40,000,000
10,000,000
30,000,000
45,000,000
60,000,000
20,000,000
300,000,000
30,000,000
45,000,000
60,000,000
20,000,000
300,000,000
5,000,000
40,000,000
10,000,000
50,000,000
350,000,000
Chapter 1
14,000,000
28,000,000
28,000,000
122,000,000
470,000,000
26,000,000
14,000,000
28,000,000
41,000,000
63,000,000
96,000,000
404,000,000
14,000,000
28,000,000
Computation of goodwill
Values of shares issued (Rp22,000 x 24,000)
Legal fees
Total purchase price
Fair value of net assets acquired
(Rp620,000,000 - Rp104,000,000)
Goodwill
Rp528,000,000
14,000,000
Rp542,000,000
(516,000,000)
Rp26,000,000
24,000,000
x
Rp18,000
Rp432,000,000
(28,000,000)
Rp404,000,000
Chapter 1
38,000,000
22,000,000
60,000,000
41,000,000
73,000,000
144,000,000
196,500,000
1,473,750,000
294,750,000
35,000,000
50,000,000
500,000,000
800,000,000
778,000,000
38,000,000
22,000,000
Rp
200,000,000
1,500,000,000
300,000,000
/
/
/
Rp2,000,000,000
Rp2,000,000,000
Rp2,000,000,000
Rp1,600,000,000
38,000,000
Rp1,638,000,000
(1,673,000,000)
Rp (35,000,000)
=
=
=
.10
.75
. 15
1.00
(Rp35,000,000 x =
Rp
.10)
196,500,000
(Rp35,000,000 x = 1,473,750,000
.75)
(Rp35,000,000 x =
294,750,000
.15)
Chapter 1
P1-25 (continued)
b. 900,000 shares issued:
Deferred Merger Costs
Deferred Stock Issue Costs
Cash
38,000,000
22,000,000
60,000,000
41,000,000
73,000,000
144,000,000
200,000,000
1,500,000,000
300,000,000
1,965,000,000
35,000,000
50,000,000
500,000,000
1,800,000,000
1,778,000,000
38,000,000
22,000,000
(1) Goodwill:
Total purchase price:
Value of stock issued (Rp4,000 x 900,000)
Merger costs
Total purchase price
Fair value of net assets acquired
(Rp41,000,000 + Rp73,000,000 + Rp144,000,000 +
Rp200,000,000
+ Rp1,500,000,000 + Rp300,000,000 - Rp35,000,000
- Rp50,000,000 - Rp500,000,000)
Goodwill
(2) Additional paid-in capital:
Rp1,778,000,000 = [(Rp4,000 - Rp2,000) x 900,000] Rp22,000,000
Rp3,600,000,000
38,000,000
Rp3,638,000,000
(1,673,000,000)
Rp1,965,000,000
Chapter 1
20,000,000
35,000,000
50,000,000
60,000,000
150,000,000
38,000,000
55,00,0000
120,000,000
178,000,000
Rp 82,000,000
175,000,000
220,000,000
140,000,000
530,000,000
Accounts Payable
Notes Payable
Common Stock
Additional Paid-In
Capital
Retained Earnings
(190,000,000)
38,000,000
Rp995,000,000
Rp140,000,000
270,000,000
200,000,000
160,000,000
225,000,000
Rp995,000,000
178,000,000
178,000,000
Chapter 1
5,000,000
5,000,000
Cash
Inventory
Buildings and Equipment (net)
Patent
Accounts Payable
Cash
Deferred Merger Costs
50,000,000
150,000,000
240,000,000
160,000,000
30,000,000
565,000,000
5,000,000
Rp570,000,000
(670,000,000)
Rp100,000,000
Fair Value
Rp300,000,
000
Patent
200,000,00
0
Rp500,000,
000
Assigned
Valuation
Rp240,000,00
0
160,000,000
Rp400,000,00
0
Chapter 1
Rp760,000,000
(620,000,000)
Rp140,000,000
(30,000,000)
(110,000,000)
Rp820,000,000
Rp950,000,000
(820,000,000)
Rp130,000,000
Rp 950,000,000
(70,000,000)
Rp 880,000,000
140,000,000
Rp1,020,000,000
Chapter 1
Reporting Unit
B
Rp80,000,000
50,000,000
50,000,000
C
Rp40,00
0,000
75,000,
000
40,000,
000
Rp 70,000,000
50,000,000
40,000,000
Rp160,000,000
Rp400,000,0
00
Rp350,000,
000
(40,000,00
0)
(310,000,00
0)
Rp
90,000,000
Rp450,000,000
(60,000,000)
Reporting unit C
Fair value of reporting unit
Fair value of identifiable assets
Fair value of accounts payable
Fair value of net assets
Implied goodwill at year-end
Rp200,000,000
(10,000,000)
Rp440,000,000
(390,000,000)
Rp 50,000,000
Rp265,000,000
(190,000,000)
Rp 75,000,000
Chapter 1
19,000,000
19,000,000
9,000,000
9,000,000
60,000,000
100,000,000
115,000,000
70,000,000
350,000,000
20,000,000
114,000,000
10,000,000
200,000,000
120,000,000
471,000,000
19,000,000
9,000,000
Computation of goodwill
Value of shares issued (Rp50,000 x 12,000)
Finder's fee
Legal fees for asset transfer
Fair value of net assets acquired
Goodwill
Rp600,000,000
10,000,000
9,000,000
Rp619,000,000
(505,000,000)
Rp114,000,000
Chapter 1
30,000,000
60,000,000
160,000,000
30,000,000
350,000,000
5,000,000
125,000,000
10,000,000
150,000,000
80,000,000
520,000,000
Cash
Accounts
Receivable
Inventory
Land
160,000,000
360,000,000
80,000,000
Buildings and
Equipment
Less: Accumulated
Depreciation
Goodwill
Accounts
Payable
Bonds Payable
Rp
60,000,000
Rp450,000,000
Less: Discount
Common
Stock
(5,000,000)
Additional
Paid-In
Capital
Retained
(250,000,000) Earnings
125,000,000
Rp1,525,000,000
445,000,000
280,000,000
950,000,000
560,000,000
180,000,000
Rp1,525,000,000
300,000
17,000,000
35,000,000
500,000,000
25,800,000
86,500,000
1,400,000
8,200,000
10,000,000
Chapter 1
Mortgage Payable
Bonds Payable
Capital Stock (Rp10 par)
Premium on Capital Stock
50,000,000
100,000,000
90,000,000
405,000,000
Chapter 1
b.
100,000,000
214,000,000
Rp
216,000,000
240,000,000
Rp
770,000,000
Rp
222,000,000
Rp
328,000,000
240,000,000
790,000,000
Rp
236,000,000
524,000,000
240,000,000
Rp1,000,000,000
Rp 260,000,000
860,000,000
240,000,000
Rp1,360,000,000
Chapter 1
Chapter 1
135,000,000
135,000,000
42,000,000
42,000,000
Cash
Accounts Receivable
Inventory
Long-Term Investments
Land
Rolling Stock
Plant and Equipment
Patents
Special Licenses
Discount on Equipment Trust Notes
Discount on Debentures
Goodwill
Allowance for Bad Debts
Current Payables
Mortgages Payable
Premium on Mortgages Payable
Equipment Trust Notes
Debentures Payable
Common Stock
Additional Paid-In Capital Common
Deferred Merger Costs
Deferred Stock Issue Costs
28,000,000
258,000,000
395,000,000
175,000,000
100,000,000
63,000,000
2,500,000,000
500,000,000
100,000,000
5,000,000
50,000,000
244,700,000
6,500,000
137,200,000
500,000,000
20,000,000
100,000,000
1,000,000,000
180,000,000
2,298,000,000
135,000,000
42,000,000
Computation of goodwill
Value of stock issued (Rp14,000 x 180,000)
Direct merger costs
Total purchase price
Fair value of assets acquired
Fair value of liabilities assumed
Fair value of net identifiable assets
Goodwill
Rp2,520,000,000
135,000,000
Rp2,655,000,000
Rp4,112,500,000
(1,702,200,000)
(2,410,300,000)
Rp 244,700,000
Chapter 1
P1-36 (continued)
b. Journal entries on the books of PT Hidrologi Kimia to record the combination:
Investment in PT Integrasi Industri Stock
Allowance for Bad Debts
Accumulated Depreciation
Current Payables
Mortgages Payable
Equipment Trust Notes
Debentures Payable
Discount on Bonds Payable
Cash
Accounts Receivable
Inventory
Long-Term Investments
Land
Rolling Stock
Plant and Equipment
Patents
Special Licenses
Gain on Sale of Assets and Liabilities
Record sale of assets and liabilities.
Common Stock
Additional Paid-In Capital Common Stock
Treasury Stock
Record retirement of Treasury Stock:*
Rp7,500,000 = Rp5,000 x 1,500 shares
Rp4,500,000 = Rp12,000,000 - Rp7,500,000
Common Stock
Additional Paid-In Capital Common
Additional Paid-In Capital Retirement
of Preferred
Retained Earnings
Investment in PT Integrasi Industri Stock
Record retirement of PT Hidrologi Kimia stock and
distribution of PT Integrasi Industri stock:
Rp592,500,000 = Rp600,000,000 - Rp7,500,000
Rp495,500 = Rp500,000 - Rp4,500
1,410,000,000 = Rp220,100,000 + Rp1,189,900,000
2,520,000,000
6,500,000
614,000,000
137,200,000
500,000,000
100,000,000
1,000,000,000
40,000,000
28,000,000
258,000,000
381,000,000
150,000,000
55,000,000
130,000,000
2,425,000,000
125,000,000
95,800,000
1,189,900,000
7,500,000
4,500,000
12,000,000
592,500,000
495,500,000
22,000,000
1,410,000,000
2,520,000,000