Important Note To Instructors: Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities

Chapter 01 - INTERCORPORATE ACQUISITIONS AND INVESTMENTS IN OTHER ENTITIES
CHAPTER 1
INTERCORPORATE ACQUISITIONS AND INVESTMENTS

IN OTHER ENTITIES
IMPORTANT NOTE TO INSTRUCTORS
The 12th edition of Advanced Financial Accounting continues the approach to

consolidation which was used in the 11 th edition. While we encourage instructors to read through
the description of all changes in the 12th edition provided in the preface to the book, we
summarize this consolidation approach here since it is the fundamental organizational structure
for several chapters in the text. As this approach is developed in chapters 2 through 5, we
believe it offers students an intuitive foundation for developing consolidated financial
statements. We summarize the two main features in our approach to consolidation in the 12th
edition here:
 A Building-Block Approach to Consolidation—Virtually all advanced financial

accounting classes cover consolidation topics. While this topic is perhaps the most
important to instructors, students frequently struggle to gain a firm grasp of consolidation
principles. This edition provides students with a learning friendly framework to
consolidations by introducing consolidation concepts and procedures gradually. This is
accomplished by a building-block approach, which introduces consolidations earlier than
some texts by beginning the consolidation discussion in chapters 2 and 3. The building-
block approach can be summarized as follows:
 Chapter 2 begins with the most basic consolidation situation: the consolidation of
a wholly owned subsidiary that is either created or purchased at an amount equal
to the book value of net assets. Thus, students practice basic consolidation
procedures without having to worry about the complications associated with a
differential or with noncontrolling shareholders.
 Chapter 3 introduces the notion of partial ownership of a subsidiary that is
created or acquired at an amount equal to the book value of net assets. In this way
students are exposed to the nuances associated with the existence of
noncontrolling shareholders, but without the details associated with a differential.
 Chapter 4 exposes students to the intricacies of consolidation when the subsidiary
is acquired for an amount that exceeds the book value of net assets. In order to
isolate the new concepts and procedures that accompany the consolidation of a
subsidiary with a differential, this chapter focuses on wholly owned subsidiaries.
Copyright © 2019 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior consent of McGraw-Hill
Education.
1-1
 Chapter 5 finally brings students full circle to the point where they are ready to
tackle more realistic situations where the parent company purchases a controlling
interest in a subsidiary (but less than 100% ownership) and the acquisition price
exceeds the book value of net assets. Thus, students learn how to simultaneously
handle all of the details associated with a differential and with noncontrolling
shareholders.
The overall coverage of the consolidation process by chapter is illustrated below.
 Organization of Consolidation Entries—Consistent with the building block approach to

consolidation, this edition facilitates the elimination of the investment in a subsidiary in
two steps: (1) first the book value portion of the investment and income from the
subsidiary are eliminated and (2) then the differential portion of the investment and
income from the subsidiary are eliminated with separate entries. This approach facilitates
the building-block approach in chapters 2-5. This edition also uses frequent illustrations
to help students visualize the steps in the consolidation process.
Education.
1-2
OVERVIEW OF CHAPTER 1
Chapter 1 provides students with an understanding of the legal forms of business

combinations and the financial statement effects of the accounting procedures used in recording
a business combination. It also discusses the proliferation of complex organizational structures
and regulatory as well as ethical considerations. This chapter fully illustrates accounting for
business combinations on the date of acquisition, using the acquisition method, both for business
combinations effected through an acquisition of net assets and by an acquisition of common
shares.
The discussions contain specific illustrations of the valuation of tangible and intangible
assets and liabilities held by the acquired company on the date of acquisition. Chapter 1 also
illustrates the measurement and reporting of goodwill and the treatment of a bargain purchase
and discusses the impairment of goodwill. It also explains the treatment of costs associated with
completing a merger and the associated disclosure requirements.
The Additional Considerations portion of the chapter discusses factors adding to
uncertainty in business combinations; in-process research and development; and noncontrolling
equity held prior to combination.
Education.
1-3
LEARNING OBJECTIVES
When students finish studying this chapter, they should be able to:
LO 1-1 Understand and explain the reasons for and different methods of business
expansion, the types of organizational structures, and the types of acquisitions.
LO 1-2 Understand the development of standards related to acquisition accounting over
time.
LO 1-3 Make calculations and prepare journal entries for the creation of a business entity.
LO 1-4 Understand and explain the differences between different forms of business
combinations.
LO 1-5 Make calculations and business combination journal entries in the presence of a
differential, goodwill, or a bargain purchase element.
LO 1-6 Understand additional considerations associated with business combinations.
SYNOPSIS OF CHAPTER 1
Intercorporate Acquisitions and Investments in Other Entities
Microsoft’s Acquisition of LinkedIn

A Brief Introduction
LO 1-1 Understand and explain the reasons for and different methods of business
expansion, the types of organizational structures, and the types of acquisitions.
An Introduction to Complex Business Structures

Enterprise Expansion
Business Objectives
Frequency of Business Combinations
Ethical Considerations
Business Expansion and Forms of Organizational Structure

Internal Expansion: Creating a Business Entity
External Expansion: Business Combinations
Organizational Structure and Financial Reporting
LO 1-2 Understand the development of standards related to acquisition accounting over

time.
The Development of Accounting for Business Combinations
Accounting for Internal Expansion: Creating Business Entities
Education.
1-4
combinations.
Accounting for External Expansion: Business Combinations

Legal Forms of Business Combinations
Methods of Effecting Business Combinations
Valuation of Business Entities
Acquisition Accounting
Fair Value Measurements
Applying the Acquisition Method
Goodwill
Combination Effected through the Acquisition of Net Assets
Combination Effected through Acquisition of Stock
Financial Reporting Subsequent to a Business Combination
Additional Considerations in Accounting for Business Combinations

Uncertainty in Business Combinations
In-Process Research and Development
Noncontrolling Equity Held Prior to Combination
Education.
1-5
NOTES ON POWERPOINT SLIDES
We have attempted to provide PowerPoint slides that will be useful to a broad set of users. Since
instructors often have different styles and preferences, we have attempted to include slides that
will accommodate different approaches and that can be adapted to classes with different levels of
preparation. For example, some instructors prefer to introduce the material before students have
read the chapter. We have tried to facilitate these types of introductory discussions by including
slides that replicate key points from the chapter. Other instructors expect students to have read
the chapter and attempted homework problems before coming to class. As a result, they may not
find it useful to review all of the topics in the chapter or to include slides that simply review
many of the details they expect students to study before class. However, instructors following
this approach often like to use sample exercises and problems built into the slides that allow
them to have extended discussions or to facilitate group interaction in class.
If instructors elect to spend two class periods on the same subject, they might find a combination
of both styles to be useful by first introducing foundational material before students have read
the chapter and studied the topic, followed by an extended discussion the next class period after
students have read the chapter and attempted homework problems.

We have tried to develop slides that can facilitate a flexible approach to allow instructors to
select the slides that best match their objectives and style for class discussions. This is the reason
we are including over 100 slides for some chapters in the text. We do not expect all instructors to
use all slides, but the slide files should help support different teaching approaches and allow
instructors to select the subset of slides that best matches their specific discussion objectives.
The slides are organized by learning objective. We have included a slide at the beginning of each
learning objective to show where the new material begins. Instructors may or may not want to
use these learning objective slides in class. We provide them primarily as a way of organizing
the material. We also include short multiple choice questions at the end of most learning
objectives. Some instructors find it useful to pause periodically during class to assess students’
level of understanding. For this reason, we include several “practice quiz questions” that can be
used throughout class discussions to engage students, help them focus on key points, or to
facilitate group interaction. Finally, we provide longer exercises and problems that many
instructors find useful in assessing understanding and encouraging group learning.
LO 1-1 Understand and explain the reasons for and different methods of business expansion,
the types of organizational structures, and the types of acquisitions.
 Slides 3-16 summarize basic concepts related to LO 1-1.
 Slide 7 provides a visual overview of internal and external expansion.
 Slides 10-11 illustrate the differences between spin-offs and split-offs.
 Instructors should choose slides from this LO that they deem most important to
emphasize to their students.
LO 1-2 Understand the development of standards related to acquisition accounting over time.
 Slides 20-22 summarize basic concepts related to LO 1-2.
Education.
1-6
 Instructors should choose slides from this LO that they deem most important to
emphasize to their students.

 Slide 28 summarizes basic concepts related to LO 1-3.
 Slide 29 provides a hands-on example about internal expansion to allow students to
think through the journal entries on the parent’s and subsidiary’s books. This example
is set up to engage students without spending a lot of time. Display the example
information and ask students to explain what journal entries the parent (Slide 30) and
subsidiary (Slide 31) would make. Instructors can click to show each journal entry as
students give their answers.
combinations.
 Slides 35-46 summarize basic business combinations as presented in the chapter.
 Slides 47-59 provide additional diagrams and detail to help students better understand
how these and other types of business combinations are consummated.
 Slides 63-72 introduce the concepts of this learning objective with a simple example.
 Slides 73-81 summarize the accounting for acquisition-related costs classified into
three general categories. The examples in slides 76-77 and 79-80 are helpful in giving
students hands on practice. Some instructors find it useful to have students take a few
minutes on each example to work individually or in small groups to attempt to solve
each exercise.
 Slides 83-89 summarize acquisition accounting for a combination resulting in
goodwill using an asset acquisition to help students visualize the calculation and
recording of goodwill.
 Slides 91-92 summarize accounting for an asset acquisition that results in a bargain
purchase.
 Slides 93-100 use a practice exercise to help students visualize how accounting for a
bargain purchase differs from a goodwill scenario.
 Slides 101-105 provide an overview of how intangibles acquired in an acquisition
should be recorded. This topic is not covered extensively in the book. Instructors may
find it useful to take a few minutes to mention this topic using these slides. In
particular, slides 101-102 provide a brief example to help students understand how
separately identifiable intangibles should be recorded separately from goodwill.
 Slide 106 is an optional example to illustrate the journal entries associated with
acquisition accounting from the perspectives of both the acquiring and the target
companies.
 Slides 107-109 summarize the journal entries that would be used in an acquisition of
stock.
 Slide 110 summarizes financial reporting subsequent to a business combination.
Education.
1-7

 Slides 116-119 summarize basic concepts related to LO 1-6 (additional
considerations).
Preview Slides:
Slides 120-125 introduce the notion of consolidation in a very basic manner. While
chapter 1 alludes to consolidation briefly, it doesn’t go into any detail. Some
instructors find it useful to introduce a very simplistic view of consolidation in
chapter 1 as a teaser for chapters 2-5. While this material is not covered in the
students’ reading, some instructors find it useful to use these slides to preview what
students will be learning in the next several chapters.
TEACHING IDEAS
1. Students could be asked to prepare a "Company Mergers & Acquisitions History." Each
student (or group) is assigned a company from the Fortune 500 list that appears annually
in the April issue of Fortune. This could be reproduced and students could be assigned a
company based on their seating order in the class. Alternatively, the instructor may have
the list and then students may select a number between 1 and 100 at random and the
instructor will tell them the name of "their" company. The students then must obtain the
M&A activity of that company for the last 10 years from Moody's Industrial Manual or
some similar source. Moody's presents this information at the beginning of each
company's profile information. The students should determine the number and magnitude
of the business combinations and investments for their company and prepare a historical
time line showing the business combinations and any other information they can obtain
on selected (or all) combinations. Several activities during the semester or quarter can be
based on the student's company selection made at this time.
2. Students can be required to conduct a key word search online and asked to provide
examples and brief descriptions of several different types of merger activities.
3. Students could access the Wall Street Journal online article database and search for an
article on a recent business combination. The students could be asked to provide a brief
oral or written summary of the article.
Education.
1-8
DESCRIPTIONS OF CASES, EXERCISES, AND PROBLEMS
C1-1 Assignment of Acquisition Costs

35 min. Students must research the current authoritative accounting standards as well as
LO 1-2, any FASB proposals regarding the treatment of acquisition costs and report their
LO 1-5 findings.
M
C1-2 Evaluation of a Merger

15 min. Students are asked to explain the funding of an acquisition as well as the impact
LO 1-1, on receivables and inventory.
LO 1-3
M
C1-3 Business Combinations
15 min. Students must identify and evaluate tax incentives and other economic factors
LO 1-4 associated with the frequency of business combinations since the 1960s.
M
C1-4 Determination of Goodwill Impairment
25 min. Students must research the authoritative literature regarding impairment testing
LO 1-5 of goodwill. Students must report their findings and explain the type of tests used
E to determine whether goodwill has been impaired and provide some examples
that would indicate possible goodwill impairment.
C1-5 Risks Associated with Acquisitions

25 min. Students must discuss the risks that Google sees inherent in potential acquisitions
LO 1-1 after researching the information provided by the company to investors about its
E motivation for acquiring companies and the possible risks associated with such
acquisitions.
Education.
1-9
C1-6 Leveraged Buyouts

25 min. Students must explain a leveraged buyout and contrast it with a management
LO 1-4 buyout. They must identify authoritative pronouncements and the major issue
M involved in determining proper basis for an interest in an LBO acquired company.
E1-1 Multiple-Choice Questions on Complex Organizations

20 min. A set of five multiple-choice questions testing students’ understanding of complex
LO 1-1, LO business organizations.
1-3, LO 1-5
M
E1-2 Multiple-Choice Questions on Recording Business Combinations
20 min. [AICPA Adapted]
LO1-2, LO A set of five multiple-choice questions test students’ basic understanding of
1-5 recording business combinations.
E
E1-3 Multiple-Choice Questions on Reported Balances
13 min. [AICPA Adapted]
LO 1-2, Four multiple-choice questions cover the computation of stockholders' equity and
LO 1-5 asset balances for the combined entity following a business combination.
M
E1-4 Multiple-Choice Questions Involving Account Balances
13 min. Five multiple-choice questions cover the computation of account balances and
LO 1-2, related journal entries after a business combination.
LO 1-5
M
E1-5 Asset Transfer to Subsidiary

20 min. Students are asked to show the journal entries made by the parent and subsidiary
LO 1-3 for the transfer of assets to the subsidiary.
E
E1-6 Creation of New Subsidiary
15 min. Students are asked to show the journal entries made by the parent and the
LO 1-3 subsidiary for the transfer of assets to the subsidiary.
E
Education.
1-10
E1-7 Balance Sheet Totals of Parent Company

15 min. Journal entries are required for transfer of assets and accounts payable between a
LO 1-2, parent company and its newly created subsidiary. Both the parent and subsidiary
LO 1-3 journal entries must be made.
E
E1-8 Acquisition of Net Assets
12 min. Students are required to show the journal entries that the parent must make at time
LO 1-2, of acquisition.
LO 1-5
M
E1-9 Reporting Goodwill

20 min. Students must calculate goodwill to be reported under different acquisition prices.
LO 1-5
M
E1-10 Stock Acquisition
10 min. Students must show the journal entry that the acquiring company must record
LO 1-5 when it issues stock for acquiring a subsidiary.
E
E1-11 Balances Reported Following Combination
20 min. Students must calculate seven balances for balance sheet accounts immediately
LO 1-5 following a business combination.
M
E1-12 Goodwill Recognition
15 min. Students must show the journal entry to be made by the acquiring company in
LO 1-5 recording a business combination involving goodwill.
E
E1-13 Acquisition Using Debentures
LO 1-5 recording a business combination executed using debentures.
M
E1-14 Bargain Purchase
LO 1-5 recording a business combination involving gain on a bargain purchase.
M
E1-15 Impairment of Goodwill
20 min. Students must calculate goodwill and potential impairment of goodwill given
LO 1-5 three different fair value amounts.
M
Education.
1-11
E1-16 Assignment of Goodwill

15 min. Students must calculate potential impairment of goodwill given three different
LO 1-5 fair value amounts.
M
E1-17 Goodwill Assigned to Reporting Units
20 min. Students must calculate reported goodwill for a company, based on information
LO 1-5 for four different reporting units.
M
E1-18 Goodwill Measurement
15 min. Students must calculate goodwill and potential impairment of goodwill given
LO 1-5 four different fair value amounts.
E
E1-19 Computation of Fair Value
20 min. Students must calculate the fair value of buildings and equipment, given the cost
LO 1-5 of acquisition, the fair value of other assets and liabilities, and the book value of
M the building and equipment.
E1-20 Computation of Shares Issued and Goodwill

20 min. Students must determine the number of shares issued, the par value of the
LO 1-5 acquiring company’s stock, and any goodwill arising from the business
M combination.
E1-21 Combined Balance Sheet
15 min. Students must prepare a balance sheet of the combined company immediately
LO 1-5 following the acquisition.
M, Ws
E1-22 Recording a Business Combination
20 min. Students must show the journal entries made by the acquiring company given
LO 1-5 financial statement information for both companies and market value of the
M acquiring company’s common stock.
E1-23 Reporting Income

15 min. Students must compute net income and earnings-per-share reported in
LO 1-5 comparative income statement for two years.
M
P1-24 Assets and Accounts Payable Transferred to Subsidiary
10 min. Students must show journal entries recorded for transfer of assets and liabilities
LO 1-3 to the newly established subsidiary.
E
P1-25 Creation of New Subsidiary
10 min. Students must show journal entries made for the transfer of assets and liabilities
LO 1-3 to a newly created entity.
E
Education.
1-12
P1-26 Incomplete Data on Creation of Subsidiary

25 min. Students must calculate book value, reported amounts, reported shares, impact on
LO 1-3 balance sheet amounts.
M
P1-27 Acquisition in Multiple Steps
20 min. Students must prepare journal entries for the completion of the acquisition of
LO 1-5 additional shares of a previously owned company.
M
P1-28 Journal Entries to Record a Business Combination
15 min. Students must show the journal entries made to record a business combination in
LO 1-5 which the acquiring company issues shares of common stock.
M
P1-29 Recording Business Combinations
15 min. Students must show the journal entries made to record a business combination in
LO 1-5 which the acquiring company issues shares of common stock.
M
P1-30 Business Combination with Goodwill
30 min. Students must show the journal entry to be recorded by the acquiring company
LO 1-5 and the balance sheet following the business combination.
E, Ws
P1-31 Bargain Purchase

LO 1-5 recording a business combination involving gain on a bargain purchase.
M
P1-32 Computation of Account Balances
15 min. Calculation of liability balance and fair value is required with simultaneous
LO 1-5 consideration of potential goodwill impairment.
M
P1-33 Goodwill Assigned to Multiple Reporting Units
25 min. Calculation of goodwill and potential goodwill impairment for multiple reporting
LO 1-5 units in a company are required.
H
P1-34 Journal Entries
15 min. Students must show journal entries recorded by the acquiring company for a
LO 1-5 business combination. Costs of combination must be considered.
M
P1-35 Purchase at More than Book Value
30 min. Students must show journal entries to record a business combination and prepare
LO 1-5 a balance sheet immediately after the business combination.
M, Ws
P1-36 Business Combination
25 min. Journal entries recorded by the acquiring company to record the business
LO 1-5 combination. Several account balances must be adjusted.
M
Education.
1-13
P1-37 Combined Balance Sheet

30 min. The balance sheet following the business combination is required. Stockholders'
LO 1-5 equity balances are required assuming three different levels of stock are issued by
H the acquiring company in completing the business combination.
P1-38 Incomplete Data

30 min. Balance sheet information for two separate entities and for the combined entity
LO 1-5 immediately after a business combination is given. Students must calculate the
M number of shares issued, market value of shares, fair value of inventory held by
the acquired company, acquired company’s net assets, goodwill arising from the
combination, retained earnings balance after combination, and depreciation
expense for the first year on the acquired company’s depreciable assets.
P1-39 Incomplete Data Following Purchase

30 min. Balance sheet information for two separate entities and for the combined entity
LO 1-5 immediately after a business combination is given. Students must calculate the
M number and price of shares issued, the amount of cash paid as stock issuance
costs, market value of shares issued on date of combination, cash paid for stock
issue costs, market value of shares issued, the fair value of inventory and net
assets, and the amount of goodwill to be reported.
P1-40 Comprehensive Business Combination

40 min. Students are given a comprehensive set of financial statements with book values
LO 1-5 and fair values. They are required to prepare all journal entries on the acquiring
M company’s books related to the business combination. Next they are asked to
present the entries that would have been entered on the acquired company’s
books.
Education.
1-14
OTHER RESOURCES
Chapter 1
Business Combination Illustration
On January 1, 20X9, Aggressive Co. acquired all the common shares of Docile Corp. by issuing
common shares. Aggressive Co. issued shares with a par value of $15,000 and a market value of
$90,000 in completing the acquisition.
Balance Sheet Data

of Individual Companies
Aggressive Co. Docile Corp. Combined

Book Fair Book Fair Combined
Value Value Value Value Value
Cash $50,000 $50,000 $20,000 $20,000 $70,000
Inventory 50,000 70,000 40,000 50,000 100,000
Building & Equipment(net) 300,000 350,000 60,000 80,000 380,000
Goodwill 12,000
TOTAL ASSETS $400,000 $120,000 $562,000
Current Liabilities $25,000 $25,000 $40,000 $40,000 $65,000

Bonds Payable 75,000 76,500 30,000 32,000 107,000
Capital Stock 200,000 20,000 215,000
Additional Paid-In Capital 30,000 10,000 105,000
Retained Earnings 70,000 20,000 70,000
TOTAL LIABILITIES AND S.E $400,000 $120,000 $562,000
COMPUTATION OF GOODWILL
Fair Value of Shares issued by Aggressive Co. $90,000

Fair Value of Docile Corp. Assets $150,000
Fair Value of Docile Corp. Liabilities (72,000)
Fair Value of Docile Corp. Net Assets (78,000)
Goodwill $12,000
Education.
1-15

Important Note To Instructors: Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities

Uploaded by

Copyright:

Available Formats

Important Note To Instructors: Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Important Note To Instructors: Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities

Uploaded by

Copyright:

Available Formats

Chapter 01 - INTERCORPORATE ACQUISITIONS AND INVESTMENTS IN OTHER ENTITIES

INTERCORPORATE ACQUISITIONS AND INVESTMENTS

IMPORTANT NOTE TO INSTRUCTORS

The 12th edition of Advanced Financial Accounting continues the approach to

 A Building-Block Approach to Consolidation—Virtually all advanced financial

The overall coverage of the consolidation process by chapter is illustrated below.

 Organization of Consolidation Entries—Consistent with the building block approach to

Chapter 1 provides students with an understanding of the legal forms of business

Intercorporate Acquisitions and Investments in Other Entities

Microsoft’s Acquisition of LinkedIn

An Introduction to Complex Business Structures

Business Expansion and Forms of Organizational Structure

LO 1-2 Understand the development of standards related to acquisition accounting over

The Development of Accounting for Business Combinations

Accounting for Internal Expansion: Creating Business Entities

Accounting for External Expansion: Business Combinations

LO 1-6 Understand additional considerations associated with business combinations.

Additional Considerations in Accounting for Business Combinations

NOTES ON POWERPOINT SLIDES

LO 1-6 Understand additional considerations associated with business combinations.

DESCRIPTIONS OF CASES, EXERCISES, AND PROBLEMS

C1-1 Assignment of Acquisition Costs

C1-2 Evaluation of a Merger

C1-5 Risks Associated with Acquisitions

C1-6 Leveraged Buyouts

E1-1 Multiple-Choice Questions on Complex Organizations

E1-5 Asset Transfer to Subsidiary

E1-7 Balance Sheet Totals of Parent Company

E1-9 Reporting Goodwill

E1-16 Assignment of Goodwill

E1-20 Computation of Shares Issued and Goodwill

E1-23 Reporting Income

P1-26 Incomplete Data on Creation of Subsidiary

P1-31 Bargain Purchase

P1-37 Combined Balance Sheet

P1-38 Incomplete Data

P1-39 Incomplete Data Following Purchase

P1-40 Comprehensive Business Combination

Balance Sheet Data

Aggressive Co. Docile Corp. Combined

Current Liabilities $25,000 $25,000 $40,000 $40,000 $65,000

Fair Value of Shares issued by Aggressive Co. $90,000

You might also like