solution manual for advanced accounting 5th editio 4f464f8a85d007e834c1c79924f0ecee

7/21/2019 Solution Manual for Advanced Accounting 5th Editio 4f464f8a85d007e834c1c79924f0ecee

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CHAPTER 1

ANSWERS TO QUESTIONS

1. Internal expansion involves a normal increase in business resulting from increased demand for products and services, achieved without acquisition of preexisting firms. Some companies expand

internally by undertaking new product research to expand their total market, or by attempting toobtain a greater share of a given market through advertising and other promotional activities.Marketing can also be expanded into new geographical areas.

xternal expansion is the bringing together of two or more firms under common control byacquisition. !eferred to as business combinations, these combined operations may be integrated, or each firm may be left to operate intact.

". #our advantages of business combinations as compared to internal expansion are$

%1& Management is provided with an established operating unit with its own experienced personnel,regular suppliers, productive facilities and distribution channels.

%"& xpanding by combination does not create new competition.

%'& (ermits rapid diversification into new markets.%)& Income tax benefits.

'. *he primary legal constraint on business combinations is that of possible antitrust suits. *he +nitedStates government is opposed to the concentration of economic power that may result from businesscombinations and has enacted two federal statutes, the Sherman ct and the -layton ct to deal withantitrust problems.

). %1& horiontal combination involves companies within the same industry that have previously been competitors.

%"& /ertical combinations involve a company and its suppliers and0or customers.

%'& -onglomerate combinations involve companies in unrelated industries having little productionor market similarities.

. statutory merger results when one company acquires all of the net assets of one or more other companies through an exchange of stock, payment of cash or property, or the issue of debtinstruments. *he acquiring company remains as the only legal entity, and the acquired companyceases to exist or remains as a separate division of the acquiring company.

statutory consolidation results when a new corporation is formed to acquire two or morecorporations, through an exchange of voting stock, with the acquired corporations ceasing to exist asseparate legal entities.

stock acquisition occurs when one corporation issues stock or debt or pays cash for all or part of thevoting stock of another company. *he stock may be acquired through market purchases or throughdirect purchase from or exchange with individual stockholders of the investee or subsidiary company.

2. tender offer is an open offer to purchase up to a stated number of shares of a given corporation at astipulated price per share. *he offering price is generally set above the current market price of theshares to offer an additional incentive to the prospective sellers.

3. stock exchange ratio is generally expressed as the number of shares of the acquiring company thatare to be exchanged for each share of the acquired company.

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4. 5efensive tactics include$%1& (oison pill 6 when stock rights are issued to existing stockholders that enable them to purchaseadditional shares at a price below market value, but exercisable only in the event of a potentialtakeover. *his tactic is effective in some cases.%"& 7reenmail 6 when the shares held by a would8be acquiring firm are purchased at an amountsubstantially in excess of their fair value. *he shares are then usually held in treasury. *his tactic is

generally ineffective.%'& 9hite knight or white squire 6 when a third firm more acceptable to the target companymanagement is encouraged to acquire or merge with the target firm.%)& (ac8man defense 6 when the target firm attempts an unfriendly takeover of the would8be acquiringcompany.%& Selling the crown :ewels 6 when the target firms sells valuable assets to others to make the firmless attractive to an acquirer.

;. In an asset acquisition, the firm must acquire 1<<= of the assets of the other firm, while in a stock acquisition, a firm may gain control by purchasing <= or more of the voting stock. lso, in a stock acquisition, formal negotiations with the target>s management can sometimes be avoided. #urther, in a

stock acquisition, there might be advantages in keeping the firms as separate legal entities such as for tax purposes.

1<. 5oes the merger increase or decrease expected earnings performance of the acquiring institution?#rom a financial and shareholder perspective, the price paid for a firm is hard to :ustify if earnings per share declines. 9hen this happens, the acquisition is considered dilutive. -onversely, if the earnings per share increases as a result of the acquisition, it is referred to as an accretive acquisition.

11. +nder the parent company concept, the writeup or writedown of the net assets of the subsidiary inthe consolidated financial statements is restricted to the amount by which the cost of the investmentis more or less than the book value of the net assets acquired. @oncontrolling interest in net assets is

unaffected by such writeups or writedowns.*he economic unit concept supports the writeup or writedown of the net assets of the subsidiary byan amount equal to the entire difference between the fair value and the book value of the net assetson the date of acquisition. In this case, noncontrolling interest in consolidated net assets is ad:ustedfor its share of the writeup or writedown of the net assets of the subsidiary.

1". a& +nder the parent company concept, noncontrolling interest is considered a liability of theconsolidated entity whereas under the economic unit concept, noncontrolling interest isconsidered a separate equity interest in consolidated net assets.

b& *he parent company concept supports partial elimination of intercompany profit whereas theeconomic unit concept supports 1<< percent elimination of intercompany profit.

c& *he parent company concept supports valuation of subsidiary net assets in the consolidatedfinancial statements at book value plus an amount equal to the parent company>s percentageinterest in the difference between fair value and book value. *he economic unit conceptsupports valuation of subsidiary net assets in the consolidated financial statements at their fair value on the date of acquisition without regard to the parent company>s percentage ownershipinterest.

d& +nder the parent company concept, consolidated net income measures the interest of theshareholders of the parent company in the operating results of the consolidated entity. +nder theeconomic unit concept, consolidated net income measures the operating results of the

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consolidated entity which is then allocated between the controlling and noncontrolling interests.

1'. *he implied fair value based on the price may not be relevant or reliable since the price paid is anegotiated price which may be impacted by considerations other than or in addition to the fair valueof the net assets of the acquired company. *here may be practical difficulties in determining thefair value of the consideration given and in allocating the total implied fair value to specific assetsand liabilities.

In the case of a less than wholly owned company, valuation of net assets at implied fair valueviolates the cost principle of conventional accounting and results in the reporting of subsidiaryassets and liabilities using a different valuation procedure than that used to report the assets andliabilities of the parent company.

1). *he economic entity is more consistent with the principles addressed in the #SA>s conceptualframework. It is an integral part of the #SA>s conceptual framework and is named specifically inS#- @o. as one of the basic assumptions in accounting. *he economic entity assumption viewseconomic activity as being related to a particular unit of accountability, and the standard indicatesthat a parent and its subsidiaries represent one economic entity even though they may includeseveral legal entities.

1. *he #SA>s conceptual framework provides the guidance for new standards. *he quality of comparability was very much at stake in #SA>s decision in "<<1 to eliminate the pooling of interests method for business combinations. *his method was also argued to violate the historicalcost principle as it essentially ignored the value of the consideration %stock& issued for theacquisition of another company.

*he issue of consistency plays a role in the recent proposal to shift from the parent concept to theeconomic entity concept, as the former method valued a portion %the noncontrolling interest& of agiven asset at prior book values and another portion %the controlling interest& of that same asset atexchange8date market value.

12. -omprehensive income is a broader concept, and it includes some gains and losses explicitly stated by #SA to bypass earnings. *he examples of such gains that bypass earnings are some changes inmarket values of investments, some foreign currency translation ad:ustments and certain gains andlosses, related to minimum pension liability.

In the absence of gains or losses designated to bypass earnings, earnings and comprehensiveincome are the same.

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ANSWERS TO BUSINESS ETHICS CASE

1. *he third item will lead to the reduction of net income of the acquired company beforeacquisition, and will increase the reported net income of the combined company subsequent toacquisition. *he accelerated payment of liabilities should not have an effect on net income incurrent or future years, nor should the delaying of the collection of revenues %assuming those

revenues have already been recorded&.

". *he first two items will decrease cash from operations prior to acquisition and will increase cashfrom operations subsequent to acquisition. *he third item will not affect cash from operations.

'. s the manager of the acquired company I would want to make it clear that my future performance %if I stay on with the consolidated company& should not be evaluated based upon afuture decline that is perceived rather than real. #urther, I would express a concern thatshareholders and other users might view such accounting maneuvers as sketchy.

).

a& arnings manipulation may be regarded as unethical behavior regardless of which side ofthe acquirer0acquiree equation you>re on. *he benefits that you stand to reap may differ,and thus your potential liability may vary. Aut the ethics are essentially the same.+ltimately the company may be one unified whole as well, and the users that are affected by any kind of distorted information may view any participant in an unsavory light.

b& See answer to %a&.

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ANSWERS TO ANALYZING FINANCIAL STATEMENTS

AFS1-1 Kraft and Cad!r" PLC

%1& 5iscuss some of the factors that should be considered in analying the impact of this merger on theincome statement for the next few years.

#actors to consider would include items such as a& cost savings b& increasing global presence and

increased revenue %from increased market share& c& gaining access to emerging markets, d& geographicaland cultural differences between the two companies. -ompanies generally pro:ect (S for a few yearsfollowing the merger, and compare these proforma calculations to the (S prior to the merger. If the (Sincreases, the merger is viewed as accretive. If not, it is dilutive. If costs can be eliminated due toredundancies, this helps move toward an accretive (S. *hese costs may be related to personnel,computer systems, advertising, etc. Bowever, the impact on the attitudes and incentives of the remaining personnel is not always easy to predict or to quantify. Synergies, in contrast, may serve to boost (S andcreate an even more positive environment going forward than anticipated.

%"& 5iscuss the pros and cons that Craft might have weighed in choosing the medium of exchange toconsummate the acquisition. 5o you think they made the right decision? If possible, use figures to

support your answer.

*he use of each to consummate a merger represents an opportunity cost, in that the cash obviously cannot be used elsewhere. company needs to weigh the alternative uses available at a given point in time. *heuse of stock increases the denominator of the (S calculation thus diluting the earnings for a the existingshareholders. *his is not necessarily a poor choice, though, as long as the increase in the numerator :ustifies the impact on the denominator. *he current stock price of the two companies determines theexchange ratio, and most companies are more comfortable using stock when its value is high because ittakes fewer shares to reach a specified acquisition price. *his view is not entirely sound, however, as the price of the target may be inflated also when the market prices are generally higher. *he use of debt toconsummate a merger is associated with increased interest costsD hence, debt is generally a wiser choice

when interest rates are low.

%'& In addition to the factors mentioned above, there are sometimes factors that cannot be quantified thatenter into acquisition decisions. 9hat do you suppose these might be in the case of CraftEs merger with-adbury?

Fne issue to consider is the cultural differences between the two companies. If one company has a GGGGGGG management style while the other is predominantly GGGGGGGG, the merger can create morale problems for individuals accustomed to being evaluated and treated in a different fashion.

%)& *his acquisition is complicated by the lack of consistency between the two companiesE methods of

accounting and currency. 5iscuss the impact that these issues are likely to have on the merged companyin the years following the acquisition.

5ifferences in methods, such as depreciation, approaches to estimated bad debts and other reserves,inventory valuation, etc. can lead to headaches and soaring costs following a merger. *ranslatingcurrency into uniform denomination, whether dollars or euros, leads to translation gains or losses, whichimpact either earnings or other comprehensive income and more headaches.

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AFS1-# Kraft and Cad!r" PLC

. -adbury>s (erformance

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AFS1-1 $%&nt'n!(d)

(art -omputations

5iscussion

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AFS1-1 $%&nt'n!(d)

(art *he trend in -adbury>s performance from "<<3 to "<<; is very strong. *he profitability ratios all increases. !F increased from ;.3= to1).=, while !F increased from '.2= to 2.'=. *he profit margin decreased slightly in "<<4 but was still strong at 2.4=. *he gross margins%not shown& remained fairly constant over the three years averaging around )2=. -adbury generated more than 4= cash from operation %-#F&in each year. *he leverage ratio decreased and the market value to book value ratio increased every year to '.)4' in "<<; %indicating goodgrowth potential&. *he asset turnover ratio %sales to assets& increased in every year, primarily from increased revenues and decreasing assets.9orking capital was negative in every year but also has been improving as -adbury has been reducing the amount of current liabilities overtime.

2007 2008 2009

Gross margin percentages 46.7% 46.7% 46.3%

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Cad!r"*+ ROE and ROA

*he solid lines in each graph represent a line where the !F or !F is equal to the three year average

!F or !F for -adbury. s shown in the last year %"<<;& both ratios exceeded the three8year averagefor both !F and !F. -onsider the !F graph. ven though the profit margin percentage wasrelatively constant %hovering around 4=& because the asset turnover was increasing %increased sales anddecreasing assets&, !F was increasing over time. -onsider the !F graph. Aecause Heverage wasdecreasing and !F was increasing, !F was increasing over time.

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AFS1-# $%&nt'n!(d)

B, Kraft F&&d+ Rat'& Ana"+'+

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AFS1-# $.art %&nt'n!(d)

-omputations$

5iscussion*he trend in Craft #ood>s performance from "<<3 to "<<; is strong. *he profitability ratios havegenerally increased over time with a slight decrease in "<<;. !F increased from ;.= to 11.2=%decreasing by 1.'= in "<<;&, while !F increased from '.4= to ).= %with a <.1= decline in "<<;&.*he profit margin increased every year and was 3.4= in "<<;. *he gross margins %not shown& remained

fluctuated over the three years averaging around ')=. Craft generated around 1<= cash from operation%-#F& in each year. *he leverage ratio has fluctuated and the market value to book value ratio initiallyincreased but then decreased by <.2 in "<<; %indicating potential growth issues&. *he asset turnover ratio%sales to assets& is showing an overall increasing trend relative to "<<3. 9orking capital has been negative but turned positive in "<<; current assets have been growing while current liabilities are decreasing.

2007 2008 2009

Gross margin percentages 33.8% 32.9% 36.0%

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Kraft F&&d+ ROE and ROA

*he solid lines in each graph represent a line where the !F or !F is equal to the three year average

!F or !F for Craft #oods. s shown in the last two years %"<<4 and "<<;& both ratios exceeded theirthree8year averages. -onsider the !F graph. ven though the profit margin percentage increased inevery year, the increase in the profit margin in "<<; was able to offset the decreased asset turnoverkeeping !F constant from "<<4 to "<<;. -onsider the !F graph. In "<<;, !F dropped even though!F remained fairly constant from "<<4 to "<<; because leverage decreased in "<<;.

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ANSWERS TO E/ERCISES

E0(r%'+( 1-1

Part A @ormal earnings for similar firms %J1,<<<,<<< 8 J4,4<<,<<<& x 1= J;'<,<<<

xpected earnings of target$

(retax income of -ondominiums, Inc., "<< J1,"<<,<<<

Subtract$ dditional depreciation on building %J;2<,<<< × 30%) %"44,<<< &

*arget>s ad:usted earnings, "<< ;1",<<<

(retax income of -ondominiums, Inc., "<<2 J1,<<,<<<Subtract$ dditional depreciation on building %"44,<<< &*arget>s ad:usted earnings, "<<2 1,"1",<<<

(retax income of -ondominiums, Inc., "<<3 J;<,<<<dd$ xtraordinary loss '<<,<<<Subtract$ dditional depreciation on building %"44,<<< &*arget>s ad:usted earnings, "<<3 ;2",<<<*arget>s three year total ad:usted earnings ',<42,<<<

*arget>s three year average ad:usted earnings %J',<42,<<< ÷ '& 1,<"4,223

xcess earnings of target J1,<"4,223 8 J;'<,<<< J;4,223 per year

(resent value of excess earnings %perpetuity& at "=$ J';),224 %stimated 7oodwill&

Implied offering price J1,<<<,<<< 6 J4,4<<,<<< K J';),224 J2,;),224.

Part B xcess earnings of target %same as in (art & J;4,223

(resent value of excess earnings %ordinary annuity& for three years at 1=$

J;4,223 × "."4'"' J"","3;

Implied offering price J1,<<<,<<< 6 J4,4<<,<<< K J"","3; J2,)","3;.

@ote$ *he sales commissions and depreciation on equipment are expected to continue at thesame rate, and thus do not necessitate ad:ustments.

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%

,$

"1

223;4



E0(r%'+( 1-#

Part A -umulative years net cash earnings J4<,<<<dd nonrecurring losses )4,<<<Subtract extraordinary gains %23,<<< &#ive8years ad:usted cash earnings J4'1,<<<verage annual ad:usted cash earnings J122,"<<

%a& stimated purchase price present value of ordinary annuity of J122,"<< %n, rate 1=&

J122,"<< × '.'"12 J3,1";

%b& Hess$ Market value of identifiable assets of Aeta J3<,<<<Hess$ Hiabilities of Aeta '"<,<<<Market value of net identifiable assets )'<,<<<Implied value of goodwill of Aeta J1"3,1";

Part B ctual purchase price J2",<<<Market value of identifiable net assets )'<,<<<

7oodwill purchased J1;,<<< E0(r%'+( 1-

Part A

@ormal earnings for similar firms %based on tangible assets only& J1,<<<,<<< x 1"= J1"<,<<<

xcess earnings J1<,<<< 6 J1"<,<<< J'<,<<<

%1& 7oodwill based on five years excess earnings undiscounted.7oodwill %J'<,<<<&% years& J1<,<<<

%"& 7oodwill based on five years discounted excess earnings7oodwill %J'<,<<<&%'.2<)4& J1<4,1)) %present value of an annuity factor for n, I1"= is '.2<)4&

%'& 7oodwill based on a perpetuity7oodwill %J'<,<<<&0."< J1<,<<<

Part B

*he second alternative is the strongest theoretically if five years is a reasonable representation of the excess earnings duration. It considers the time value of money and assigns a finite life.lternative three also considers the time value of money but fails to assess a duration period for

the excess earnings. lternative one fails to account for the time value of money. Interestingly,alternatives one and three yield the same goodwill estimation and it might be noted that theassumption of an infinite life is not as absurd as it might sound since the present value becomesquite small beyond some horion.

Part C

7oodwill L-ost less %fair value of assets less the fair value of liabilities&,Fr, -ost less fair value of net assets

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<<<4'1 ,$



7oodwill %J4<<,<<< 6 %J1,<<<,<<< 8 J)<<,<<<&& J"<<,<<<ANSWERS TO ASC $A%%&!nt'n2 Standard+ C&d'f'%at'&n) E/ERCISES

ASC1-1 Cr&++-R(f(r(n%( *he conditions determining whether a lease is classified as an operating leaseor a capital lease were prescribed in SFAS No. 13, paragraph 3. 9here is this located in this -odification?

Step 1$ -hoose the cross reference tab on the opening page of the -odification.

Step "$ +se the NAy Standard> drop down menu. -hoose #S as the standard type and <1' as the standardnumber. -lick on N7enerate !eport.>

(aragraph 3 of SFAS No. 13 is included in five paragraphs in the -odificationD #SA S- paragraphs4)<81<8" 1,";,'<,'1, and )1. #SA S- paragraph 4)<81<8"81 lists the four basic criteria %transfer ofownership, bargain purchase option, lease term, and minimum lease payments&.

ASC1-# Cr&++-R(f(r(n%( *he rules defining the conditions to classify an item as extraordinary on theincome statement were originally listed in APB Opinion No 30, paragraph "<. 9here is this informationlocated in the -odification?

Step 1$ -hoose the cross reference tab on the opening page of the -odification.Step "$ +se the NAy Standard> drop down menu. -hoose (A as the standard type and '< as the standardnumber. -lick on N7enerate !eport.>

(aragraph "< of APB Opinion No 30 is included in three paragraphs in the -odificationD #SA S- paragraphs ""8"<8)8" and 4 and #SA S- paragraph ""8"<818".

*he definition for extraordinary item is also included in the master glossary. #SA S- paragraph ""8"<8)8" lists the two criteria to classify an event or transaction as an extraordinary item$ unusual natureand infrequency of occurrence.

ASC1- 3'+%&+!r( Suppose a firm entered into a capital lease, debiting an asset account and crediting alease liability account for J1<,<<<. 5oes this transaction need to be disclosed as part of the statement ofcash flows? If so, where?

5isclosure requirements are always section < in the -odification %S- xxx8xx8<8x&. (resentation of thestatement of cash flows is found under general topic number "<< as topic "'<, %S- "'<8xx8<8x&.

Oes #SA S- paragraphs "'<81<8<8' and ). Information about all investing and financing activities of an entity during a period that affect recognied assets or liabilities but that do not result in cash receipts or cash payments in the period shall be disclosed. xamples include obtaining an asset by entering into acapital lease.

ASC1-4 G(n(ra Pr'n%'.(+ ccounting textbooks under the former 7( hierarchy were consideredlevel ) authoritative. 9here do accounting textbooks stand in the -odification?

*he topic that established the -odification as authoritative 7( is *opic 1<. #SA S- paragraph1<81<8<8' states that accounting textbooks are nonauthoritative accounting guidance and literature.

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ASC1-5 Pr(+(ntat'&n Bow many years of comparative financial statements are required under current7(?

uthoritative guidance for financial statement presentation is found in #SA S- *opic "< L,(resentation of #inancial Statements #SA S- paragraph "<81<8)8" states that it is desirable thatthe statement of financial position, the income statement, and the statement of changes in equity be presented for one or more preceding years, as well as for the current year.

ASC1-6 O7(r7'(8 -an the provisions of the -odification be ignored if the item is immaterial?

Fverview and background requirements are always section < in the -odification %S- xxx8xx8<8x&. Inthe search box on the -odification homepage, search for Immaterial. In the Nnarrow by area> column,click in the box next to Ngeneral principles> since the question asks whether 7( needs to be followed if an item is immaterial. -lick on go. *he result indicates that #SA S- paragraph 1<81<8<82 states thatthe provisions of the codification need not be applied to immaterial items.

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solution manual for advanced accounting 5th editio 4f464f8a85d007e834c1c79924f0ecee

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