高级会计学比姆斯第十版答案英文
Principles of Corporate Finance 英文第十版习题解答Chap015
CHAPTER 15How Corporations Issue SecuritiesAnswers to Problem Sets1. a. Further sale of an already publicly traded stockb. U.S. bond issue by foreign corporationc. Bond issue by industrial companyd. Bond issue by large industrial company.2. a. Bb. Ac. Dd. C3. a. Financing of start-up companies.b. Underwriters gather non-binding indications of demand for a new issue.c. The difference between the price at which the underwriter buys thesecurity from the company and re-sells it to investors.d. Description of a security offering filed with the SEC.e. Winning bidders for a new issue tend tooverpay.4. a. A large issueb. A bond issuec. Subsequent issue of stockd. A small private placement of bonds.5. a.Falseb.Falsec. True6. a.Net proceeds of public issue = 10,000,000 - 150,000 - 80,000 =$9,770,000; net proceeds of private placement = $9,970,000.b.PV of extra interest on private placement =000,328$085.1000,000,10005.101=⨯∑=t t i.e., extra cost of higher interest on private placement more than outweighs saving in issue costs.N.b. We ignore taxes.c.Private placement debt can be custom-tailored and the terms more easily renegotiated.7. a.Number of new shares, 50,000b.Amount of new investment, $500,000c.Total value of company after issue, $4,500,000d.Total number of shares after issue, 150,000e.Stock price after issue, $4,500,000/150,000 = $30f.The opportunity to buy one share is worth $20.8. a.Zero-stage financing represents the savings and personal loans the company’s principals raise to start a firm. First -stage and second-stage financing comes from funds provided by others (often venture capitalists) to supplement the founders’ investment.b.Carried interest is the name for the investment profits paid to a private equity or venture capitalist partnershipc. A rights issue is a sale of additional securities to existing investors; itcan be contrasted with an at large issuance (which is made to allinterested investors).d. A road show is a presentation about the firm given to potentialinvestors in order to gauge their reactions to a stock issue and toestimate the demand for the new shares.e. A best efforts offer is an underwriter’s promise to sell as much aspossible of a security issue.f. A qualified institutional buyer is a large financial institution which,under SEC Rule 144A, is allowed to trade unregistered securitieswith other qualified institutional buyers.g. Blue-sky laws are state laws governing the sale of securities withinthe state.h. A greenshoe option in an underwriting agreement gives theunderwriter the option to increase the number of shares theunderwriter buys from the issuing company.9. a. Management’s willingness to invest in Marvin’s equity was a crediblesignal because the management team stood to lose everything if the newventure failed, and thus they signaled their seriousness. By acceptingonly part of the venture capital that would be needed, management wasincreasing its own risk and reducing that of First Meriam. This decisionwould be costly and foolish if Marvin’s management team lackedconfidence that the project would get past the first stage.b. Marvin’s management agreed not to accept lavish salaries. The cost ofmanagement perks comes out of the shareholders’ pockets. In Marvin’scase, the managers are the shareholders.10. If he is bidding on under-priced stocks, he will receive only a portion of theshares he applies for. If he bids on under-subscribed stocks, he will receive hisfull allotment of shares, which no one else is willing to buy. Hence, on average,the stocks may be under-priced but once the weighting of all stocks is considered, it may not be profitable.11. There are several possible reasons why the issue costs for debt are lower thanthose of equity, among them:The cost of complying with government regulations may be lower for debt.The risk of the security is less for debt and hence the price is less volatile.This decreases the probability that the issue will be mis-priced and thereforede creases the underwriter’s risk.12. a.Inelastic demand implies that a large price reduction is needed in order to sell additional shares. This would be the case only if investors believe that a stock has no close substitutes (i.e., they value the stock for its unique properties).b.Price pressure may be inconsistent with market efficiency. It implies that the stock price falls when new stock is issued and subsequently recovers.c.If a company’s stock is undervalued, managers will be reluctant to sell new stock, even if it means foregoing a good investment opportunity. The converse is true if the stock is overvalued. Investors know this and, therefore, mark down the price when companies issue stock. (Of course, managers of a company with undervalued stock become even more reluctant to issue stock because their actions can be misinterpreted.)If (b) is the reason for the price fall, there should be a subsequent price recovery. If (a) is the reason, we would not expect a price recovery, but the fall should be greater for large issues. If (c) is the reason, the price fall will depend only on issue size (assuming the information is correlated with issue size).13. a. Example: Before issue, there are 100 shares outstanding at $10 per share. The company sells 20 shares for cash at $5 per share. Company value increases by: (20 x $5) = $100. Thus, after issue, each share is worth: $9.17120$1,10020100$100$10)(100==++⨯ Note that new shareholders gain: 20 ⨯ $4.17 = $83 Old shareholders lose: 100 ⨯ $0.83 = $83b. Example: Before issue, there are 100 shares outstanding at $10 per share. The company makes a rights issue of 20 shares at $5 per share. Each right is worth:The new share price is $9.17. If a shareholder sells his right, he receives$0.83 cash and the value of each share declines by: $10 - $9.17 = $0.83The shareholder’s total wealth is unaffected.$0.8365101N price)(issue price)on (rights right of Value =-=+-=14. a.€5 ⨯ (10,000,000/4) = €12.5 million b. =+-=+-=14561N price)issue (price)on (rights right of Value €0.20 c. =++⨯=2,500,00010,000,00012,500,0006)0(10,000,00 price Stock €5.80 A stockholder who previously owned four shares had stocks with a valueof: (4 ⨯ €6) = €24. This stockholder has now paid €5 for a fifth share sothat the total value is: (€24 + €5) = €29. This stockholder now owns fiveshares with a value of: (5 ⨯ €5.80) = €29, so that she is no better or worseoff than she was before.d.The share price would have to fall to the issue price per share, or €5 per share. Firm value would then be: 10 million ⨯ €5 = €50 million15. €12,500,000/€4 = 3,125,000 shares 10,000,000/3,125,000 = 3.20 rights per share=+-=+-=13.2461N price)issue (price)on (rights right of Value €0.48 =++⨯=3,125,00010,000,00012,500,0006)0(10,000,00 price Stock €5.52 A stockholder who previously owned 3.2 shares had stocks with a value of:(3.2 ⨯ €6) = €19.20. This stockholder has now paid €4 for an additional share, so that the total value is: (€19.20 + €4) = €23.20. This stockholder now owns 4.2shares with a value of: (4.2 ⨯ €5.52) = €23.18 (difference due to rounding).16. Before the general cash offer, the value of the firm’s equity is:10,000,000 × €6 = €60,000,000New financing raised (from Practice Question 16) is €12,500,000Total equity after general cash offer = €60,000,000 + €12,500,000 = €72,500,000 Total new shares = €12,500,000/€4 = 3,125,000Total shares after general cash offer = 10,000,000 + 3,125,000 = 13,125,000Price per share after general cash offer = €72,500,000/13,125,000 = €5.5238Existing shareholders have lost = €6.00 – €5.5238 = €0.4762 per shareTotal loss for existing shareholders = €0.4762 × 10,000,000 = €4,762,000New shareholders have gained = €5.5238 –€4.00 = €1.5238 per shareTotal gain for new shareholders = €1.5238 × 3,125,000 = €4,761,875Except for rounding error, we see that the gain for the new shareholders comesat the expense of the existing shareholders.17. a. 135,000 sharesb. 500,000 shares in the primary offering; 400,000 shares in the secondaryofferingc. $25 or 31%; this seems higher than the average underpricing of IPOsd. Underwriting cost $5.04 millionAdministrative cost $0.82 millionUnderpricing $22.5 millionTOTAL $28.36 million18. Some possible reasons for cost differences:a. Large issues have lower proportionate costs.b. Debt issues have lower costs than equity issues.c. Initial public offerings involve more risk for underwriters than issues ofseasoned stock. Underwriters demand higher spreads in compensation. 19. a. Venture capital companies prefer to advance money in stages becausethis approach provides an incentive for management to reach the nextstage, and it allows First Meriam to check at each stage whether theproject continues to have a positive NPV. Marvin is happy because itsignals their confidence. With hindsight, First Meriam loses because ithas to pay more for the shares at each stage.b. The problem with this arrangement would be that, while Marvin wouldhave an incentive to ensure that the option was exercised, it would nothave the incentive to maximize the price at which it sells the new shares.c. The right of first refusal could make sense if First Meriam was making alarge up-front investment that it needed to be able to recapture in itssubsequent investments. In practice, Marvin is likely to get the best dealfrom First Meriam.20. In a uniform-price auction, all successful bidders pay the same price. In adiscriminatory auction, each successful bidder pays a price equal to his own bid.A uniform-price auction provides for the pooling of information from bidders and reducesthe winner’s curse.21. Pisa Construction’s return on investment is 8%, whereas investors require a 10%rate of return. Pisa proposes a scenario in which 2,000 shares of common stockare issued at $40 per share, and the proceeds ($80,000) are then invested at 8%.Assuming that the 8% return is received in the form of a perpetuity, then the NPV for this scenario is computed as follows:–$80,000 + (0.08 $80,000)/0.10 = –$16,000Share price would decline as a result of this project, not because the companysells shares for less than book value, but rather due to the fact that the NPV isnegative.Note that, if investors know price will decline as a consequence of Pisa’sundertaking a negative NPV investment, Pisa will not be able to sell shares at$40 per share. Rather, after the announcement of the project, the share pricewill decline to:($400,000 – $16,000)/10,000 = $38.40Therefore, Pisa will have to issue: $80,000/$38.40 = 2,083 new sharesOne can show that, if the proceeds of the stock issue are invested at 10%, thenshare price remains unchanged.。
财务会计英文影印版第十版课后练习题含答案 (2)
财务会计英文影印版第十版课后练习题含答案简介本文档为《财务会计英文影印版第十版》的课后练习题及答案。
该书是一本介绍财务会计的教材，涵盖了财务会计理论和实践，适用于财务会计初学者。
练习题Chapter 11.1 Expln the difference between management accounting and financial accounting.1.2 Expln the purpose of financial statements.1.3 Expln the role of the audit committee.1.4 Expln the difference between the balance sheet and the income statement.Chapter 22.1 Expln the difference between revenue and profit.2.2 Expln the difference between cash basis accounting and accrual basis accounting.2.3 Expln the purpose of the statement of cash flows.Chapter 33.1 Expln the difference between current and non-current assets.3.2 Expln the difference between current and non-current liabilities.3.3 Expln the difference between financing activities and investing activities.Chapter 44.1 Expln the purpose of the double-entry accounting system.4.2 Expln the difference between debits and credits.4.3 Expln the purpose of the trial balance.Chapter 55.1 Expln the difference between the cost of goods sold and operating expenses.5.2 Expln the purpose of the income statement.5.3 Expln the difference between gross profit and net profit.答案Chapter 11.1 Management accounting is concerned with providing information for internal decision-making, while financial accounting is concerned with providing information to external users.1.2 The purpose of financial statements is to provide information about an entity’s financial performance, financial position, and cash flows.1.3 The audit committee is responsible for overseeing the financial reporting process and ensuring the integrity of financial statements.1.4 The balance sheet shows an entity’s financial position at a specific point in time, while the income statement shows an entity’s financial performance over a period of time.Chapter 22.1 Revenue represents the amounts earned from the sale of goods or services, while profit represents the difference between revenue and expenses.2.2 Cash basis accounting recognizes revenue and expenses when cash is received or pd, while accrual basis accounting recognizes revenue and expenses when they are earned or incurred, regardless of when cash is received or pd.2.3 The statement of cash flows is used to show the inflows and outflows of cash from operating, investing, and financing activities.Chapter 33.1 Current assets are expected to be converted to cash within one year, while non-current assets are expected to be held for more than one year.3.2 Current liabilities are expected to be pd within one year, while non-current liabilities are expected to be pd after one year.3.3 Financing activities involve obtning funds from external sources and paying dividends to shareholders, while investing activities involve acquiring and disposing of property, plant, and equipment, and other long-term investments.Chapter 44.1 The double-entry accounting system ensures that everytransaction is recorded in two accounts, with equal debits and credits,in order to mntn the equality of debits and credits in the accounting equation.4.2 Debits are used to record increases in assets and expenses and decreases in liabilities and equity, while credits are used to record increases in liabilities and equity and decreases in assets and expenses.4.3 The trial balance is a list of all the accounts in the ledgerwith their balances, used to ensure that the total of the debits equals the total of the credits.Chapter 55.1 The cost of goods sold represents the cost of the goods or services sold by a company, while operating expenses represent the other costs of running a business.5.2 The income statement shows a company’s revenue, expenses, andnet income or loss for a period of time.5.3 Gross profit represents revenue minus the cost of goods sold, while net profit represents gross profit minus operating expenses.结论本文档为《财务会计英文影印版第十版》课后练习题及答案，涵盖了财务会计的基本理论和实践。
Principles of Corporate Finance 英文第十版习题解答Chap004
CHAPTER 4The Value of Common StocksAnswers to Problem Sets1. a. Trueb. True2. Investors who buy stocks may get their return from capital gains as well asdividends. But the future stock price always depends on subsequent dividends.There is no inconsistency.3. P0 = (5 + 110)/1.08 = $106.484. r = 5/40 = .125.5. P0 = 10/(.08 - .05) = $333.33.6. By year 5, earnings will grow to $18.23 per share. Forecasted price per share atyear 4 is 18.23/.08 = $227.91.7. 15/.08 + PVGO = 333.33; therefore PVGO = $145.83.8. Z’s forecasted dividends and prices grow as follows:Calculate the expected rates of return:From year 0 to 1: 08.33.333)33.333350(10=-+From year 1 to 2: 08.350)35050.367(50.10=-+From year 2 to 3:08.50.367)50.36788.385(03.11=-+Double expects 8% in each of the first 2 years. Triple expects 8% in each of the first 3 years.9. a. Falseb. True.10. PVGO = 0, and EPS 1 equals the average future earnings the firm could generate under no-growth policy.11. Free cash flow is the amount of cash thrown off by a business after allinvestments necessary for growth. In our simple examples, free cash flow equals operating cash flow minus capital expenditure. Free cash flow can be negative if investments are large.12. The value at the end of a forecast period. Horizon value can be estimated using the constant-growth DCF formula or by using price –earnings or market – book ratios for similar companies.13. If PVGO = 0 at the horizon date H , horizon value = earnings forecasted for H + 1 divided by r .14. Newspaper exercise, answers will vary15.Expected Future Values Present Values Horizon Period (H) Dividend (DIV t ) Price (P t ) Cumulative Dividends FuturePrice Total0 100.00 100.00100.001 10.00 105.00 8.70 91.30 100.002 10.50 110.25 16.64 83.36 100.003 11.03 115.76 23.88 76.12 100.004 11.58 121.55 30.50 69.50 100.00 10 15.51 162.89 59.74 40.26 100.00 20 25.27 265.33 83.79 16.21 100.00 50 109.21 1,146.74 98.94 1.06 100.00 100 1,252.39 13,150.13 99.99 0.01 100.00Assumptions 1. Dividends increase at 5% per year compounded. 2. Capitalization rate is 15%.16.$100.000.10$10r DIV P 1A ===$83.33.0400.10$5g r DIV P 1B =-=-=⎪⎭⎫⎝⎛⨯++++++=67665544332211C 1.1010.10DIV 1.10DIV 1.10DIV 1.10DIV 1.10DIV 1.10DIV 1.10DIV P $104.501.1010.1012.441.1012.441.1010.371.108.641.107.201.106.001.105.00P 6654321C =⎪⎭⎫⎝⎛⨯++++++=At a capitalization rate of 10%, Stock C is the most valuable. For a capitalization rate of 7%, the calculations are similar. The results are:P A = $142.86 P B = $166.67 P C = $156.48Therefore, Stock B is the most valuable.17. a. $21.90.027500.095 1.0275$1.35$1.35g r DIV DIV P 100=-⨯+=-+=b.First, compute the real discount rate as follows:(1 + r nominal ) = (1 + r real ) ⨯ (1 + inflation rate)1.095 = (1 + r real ) ⨯ 1.0275(1 + r real ) = (1.095/1.0275) – 1 = .0657 = 6.57%In real terms, g = 0. Therefore:$21.900.0657$1.35$1.35g r DIV DIV P 100=+=-+= 18.a. Plowback ratio = 1 – payout ratio = 1.0 – 0.5 = 0.5Dividend growth rate = g= Plowback ratio × ROE = 0.5 × 0.14 = 0.07 Next, compute EPS 0 as follows:ROE = EPS 0 /Book equity per share 0.14 = EPS 0 /$50 ⇒ EPS 0 = $7.00Therefore: DIV 0 = payout ratio × EPS 0 = 0.5 × $7.00 = $3.50 EPS and dividends for subsequent years are:YearEPS DIV0 $7.00$7.00 × 0.5 = $3.501 $7.00 × 1.07 = $7.4900 $7.4900 × 0.5 = $3.50 × 1.07 = $3.74502 $7.00 × 1.072 = $8.0143 $8.0143 × 0.5 = $3.50 × 1.072 = $4.0072 3 $7.00 × 1.073 = $8.5753 $8.5753 × 0.5 = $3.50 × 1.073 = $4.28774 $7.00 × 1.074 = $9.1756$9.1756 × 0.5 = $3.50 × 1.074 = $4.58785 $7.00 × 1.074 × 1.023 = $9.3866 $9.3866 × 0.5 = $3.50 × 1.074 × 1.023 = $4.6933EPS and dividends for year 5 and subsequent years grow at 2.3% per year, as indicated by the following calculation:Dividend growth rate = g = Plowback ratio × ROE = (1 – 0.08) × 0.115 = 0.023b.⎪⎭⎫ ⎝⎛⨯++++=45443322110 1.11510.115DIV 1.115DIV 1.115DIV 1.115DIV 1.115DIV P $45.651.1010.023-0.1154.6931.1154.5881.1154.2881.1154.0071.1153.74544321=⎪⎭⎫⎝⎛⨯++++=The last term in the above calculation is dependent on the payout ratioand the growth rate after year 4.19. a.11.75%0.11750.0752008.5g P DIV r 01==+=+=b.g = Plowback ratio × ROE = (1 − 0.5) × 0.12 = 0.06 = 6.0%The stated payout ratio and ROE are inconsistent with the security analysts’ forecasts. With g = 6.0% (and assuming r remains at 11.75%) then:pesos 147.830.06- 0.11758.5g r DIV P 10==-=20.The security analyst’s forecast is wrong because it a ssumes a perpetual constant growth rate of 15% when, in fact, growth will continue for two years at this rate and then there will be no further growth in EPS or dividends. The value of the company’s stock is the present value of the expected divi dend of $2.30 to be paid in 2020 plus the present value of the perpetuity of $2.65 beginning in 2021. Therefore, the actual expected rate of return is the solution for r in the following equation:r)r(1$2.65r 1$2.30$21.75+++=Solving algebraically (using the quadratic formula) or by trial and error, we find that: r = 0.1201= 12.01% 21.a.An Incorrect Application . Hotshot Semiconductor’s earnings anddividends have grown by 30 percent per year since the firm’s founding ten years ago. Current stock price is $100, and next year’s dividend is projected at $1.25. Thus:31.25%.31250.3001001.25g P DIV r 01==+=+=This is wrong because the formula assumes perpetual growth; it is notpossible for Hotshot to grow at 30 percent per year forever.A Correct Application. The formula might be correctly applied to the Old Faithful Railroad, which has been growing at a steady 5 percent rate for decades. Its EPS 1 = $10, DIV 1 = $5, and P 0 = $100. Thus:10.0%.100.0501005g P DIV r 01==+=+=Even here, you should be careful not to blindly project past growth into thefuture. If Old Faithful hauls coal, an energy crisis could turn it into a growth stock.b.An Incorrect Application. Hotshot has current earnings of $5.00 per share. Thus:5.0%.0501005P EPS r 01====This is too low to be realistic. The reason P 0 is so high relative to earningsis not that r is low, but rather that Hotshot is endowed with valuable growth opportunities. Suppose PVGO = $60:PVGO rEPS P 10+=60r5100+=Therefore, r = 12.5%A Correct Application. Unfortunately, Old Faithful has run out of valuable growth opportunities. Since PVGO = 0:PVGO r EPS P 10+=0r10100+=Therefore, r = 10.0%22.gr NPVr EPS price Share 1-+= Therefore:0.15)(r NP V r E P S Ραα1αα-+=α0.08)(r NP V r E P S Ρββββ1β-+=The statement in the question implies the following:⎪⎪⎭⎫⎝⎛-+->⎪⎪⎭⎫ ⎝⎛-+-0.15)(r NPV r EPS 0.15)(r NPV 0.08)(r NPV r EPS 0.08)(r NPV αααα1ααββββ1ββ Rearranging, we have:β1βββα1αααE P S r 0.08)(r NP V E P S r0.15)(r NP V ⨯-<⨯- a.NPV α < NPV β, everything else equal.b. (r α - 0.15) > (r β - 0.08), everything else equal.c.0.08)(r NP V 0.15)(r NP V ββαα-<-, everything else equal. d. β1βα1αE P S r E P S r <, everything else equal. 23.a.Growth-Tech’s stock price should be:23.81.08)0(0.12$1.24(1.12)1(1.12)$1.15(1.12)$0.60(1.12)$0.50P 332$=⎪⎪⎭⎫ ⎝⎛-⨯+++=b.The horizon value contributes:$22.07.08)0(0.12$1.24(1.12)1)P V(P 3H =-⨯=c.Without PVGO, P 3 would equal earnings for year 4 capitalized at 12 percent:$20.750.12$2.49= Therefore: PVGO = $31.00 – $20.75 = $10.25d.The PVGO of $10.25 is lost at year 3. Therefore, the current stock price of $23.81 will decrease by:$7.30(1.12)$10.253= The new stock price will be: $23.81 – $7.30 = $16.5124.a.Here we can apply the standard growing perpetuity formula with DIV 1 = $4, g = 0.04 and P 0 = $100:8.0%.080.040$100$4g P DIV r 01==+=+=The $4 dividend is 60 percent of earnings. Thus:EPS 1 = 4/0.6 = $6.67Also:PVGO rEPS P 10+=PVGO 0.08$6.67$100+=PVGO = $16.63b.DIV 1 will decrease to: 0.20 ⨯ 6.67 = $1.33However, by plowing back 80 percent of earnings, CSI will grow by 8 percent per year for five years. Thus: Year 1 2 3 4 5 6 7, 8 . . . DIV t 1.33 1.44 1.55 1.68 1.81 5.88 Continued growth at EPS t6.677.207.788.409.079.80 4 percentNote that DIV 6 increases sharply as the firm switches back to a 60 percent payout policy. Forecasted stock price in year 5 is:$147.0400.085.88g r DIV P 65=-=-=Therefore, CSI’s stock price will increase to:$106.211.081471.811.081.681.081.551.081.441.081.33P 54320=+++++=25.a.First, we use the following Excel spreadsheet to compute net income (or dividends) for 2009 through 2013:2009 2010 2011 2012 2013 Production (million barrels) 1.8000 1.6740 1.5568 1.4478 1.3465 Price of oil/barrel 65 60 55 50 52.5 Costs/barrel 25 25 25 25 25 Revenue 117,000,000 100,440,000 85,625,100 72,392,130 70,690,915 Expenses 45,000,000 41,850,000 38,920,500 36,196,065 33,662,340 Net Income (= Dividends) 72,000,000 58,590,000 46,704,600 36,196,065 37,028,574Next, we compute the present value of the dividends to be paid in 2010,2011 and 2012:=++=320 1.0936,196,0651.0946,704,6001.0958,590,000P $121,012,624 The present value of dividends to be paid in 2013 and subsequent yearscan be computed by recognizing that both revenues and expenses can be treated as growing perpetuities. Since production will decrease 7%per year while costs per barrel remain constant, the growth rate of expenses is: –7.0%To compute the growth rate of revenues, we use the fact that production decreases 7% per year while the price of oil increases 5% per year, so that the growth rate of revenues is:[1.05 × (1 – 0.07)] – 1 = –0.0235 = –2.35%Therefore, the present value (in 2012) of revenues beginning in 2013 is:45$622,827,4(-0.0235)-0.0970,690,915PV 2012==Similarly, the present value (in 2012) of expenses beginning in 2013 is:25$210,389,6(-0.07)-0.0933,662,340P V 2012==Subtracting these present values gives the present value (in 2012) of net income, and then discounting back three years to 2009, we find that the present value of dividends paid in 2013 and subsequent years is: $318,477,671The total value of the company is:$121,012,624 + $318,477,671 = $439,490,295Since there are 7,000,000 shares outstanding, the present value per share is:$439,490,295 / 7,000,000 = $62.78b. EPS 2009 = $72,000,000/7,000,000 = $10.29 EPS/P = $10.29/$62.78 = 0.16426.[Note: In this problem, the long-term growth rate, in year 9 and all later years, should be 8%.]The free cash flow for years 1 through 10 is computed in the following table:Year1 2 3 4 5 6 7 8 9 10 Asset value 10.00 12.00 14.40 17.28 20.74 23.12 25.66 28.36 30.63 33.08 Earnings 1.20 1.44 1.73 2.07 2.49 2.77 3.08 3.40 3.68 3.97 Investment 2.00 2.40 2.88 3.46 2.38 2.54 2.69 2.27 2.45 2.65 Free cash flow -0.80-0.96-1.15-1.380.100.230.381.131.23 1.32 Earnings growth from previous period20.0% 20.0% 20.0% 20.0% 20.0% 11.5% 11.0% 10.5%8.0%8.0%Computing the present value of the free cash flows, following the approach from Section 4.5, we find that the present value of the free cash flows occurring in years 1 through 7 is:654321 1.100.231.100.101.101.38-1.101.15-1.100.96-1.100.80-PV +++++==+71.100.38-$2.94 The present value of the growing perpetuity that begins in year 8 is:29.10.08)0(0.101.1343(1.10)1PV 7$=⎪⎪⎭⎫ ⎝⎛-⨯= Therefore, the present value of the business is:-$2.94 + $29.10 = $26.16 million27.From the equation given in the problem, it follows that:bROE )/(r b1ROE )(b r b)(1ROE BVP S P 0--=⨯--⨯= Consider three cases:ROE < r ⇒ (P 0/BVPS) < 1 ROE = r ⇒ (P 0/BVPS) = 1 ROE > r ⇒ (P 0/BVPS) > 1Thus, as ROE increases, the price-to-book ratio also increases, and, when ROE = r, price-to-book equals one. 28.Assume the portfolio value given, $100 million, is the value as of the end of the first year. Then, assuming constant growth, the value of the contract is given by the first payment (0.5 percent of portfolio value) divided by (r – g). Also:r = dividend yield + growth rateHence:r – growth rate = dividend yield = 0.05 = 5.0%Thus, the value of the contract, V, is:million $100.05million$1000.005V =⨯=For stocks with a 4 percent yield:r – growth rate = dividend yield = 0.04 = 4.0%Thus, the value of the contract, V, is:Chapter 04 - The Value of Common Stocks 4-11 million $12.50.04million $1000.005V =⨯=29. If existing stockholders buy newly issued shares to cover the $3.6 millionfinancing requirement, then the value of Concatco equals the discounted value of the cash flows (as computed in Section 4.5): $18.8 million.Since the existing stockholders own 1 million shares, the value pershare is $18.80.Now suppose instead that the $3.6 million comes from new investors, who buy shares each year at a fair price. Since the new investors buy shares at a fair price, the value of the existing stockholders’ shares must remain at $18.8 million. Since existing stockholders expect to earn 10% on their investment, the expected value of their shares in year 6 is:$18.8 million × (1.10) 6 = $33.39 millionThe total value of the firm in year 6 is:$1.59 million / (0.10 – 0.06) = $39.75 millionCompensation to new stockholders in year 6 is:$39.75 million – $33.39 million = $6.36 millionSince existing stockholders own 1 million shares, then in year 6, newstockholders will own:($6.36 million / $33.39 million) × 1,000,000 = 190,300 sharesShare price in year 6 equals:$39.75 million / 1.1903 million = $33.39。
习题答案Principles of Corporate Finance第十版 Chapter
b.More profitable firms can rely more on internal cash flow and need less
external financing.
11.Financial slack is most valuable to growth companies with good but uncertain
8.Debt ratios tend to be higher for larger firms with more tangible assets. Debt ratios tend to be lower for more profitable firms with higher market-to-book ratios.
9.When a company issues securities, outside investors worry that management may have unfavorable information. If so the securities can be overpriced. This worry is much less with debt than equity. Debt securities are safer than equity, and their price is less affected if unfavorable news comes out later.
The interest payments would simply add to its tax-loss carry-forwards. Such a firm would have little tax incentive to borrow.
高级会计学英文版第十版课后练习题含答案
高级会计学英文版第十版课后练习题含答案Chapter 1Multiple Choice Questions1.A primary reason for a business to organize as a corporationis to A. allow shareholders to limit their losses to the amount they have invested in the company. B. limit the amount of taxes the company pays. C. make it easier for the company to secureloans from banks and other lenders. D. ensure that the company’s management is not subject to legal liability.Answer: A2.Which of the following statements is true? A. A partnershipis a legal entity separate from its owners. B. A soleproprietorship has limited liability. C. A corporation is owned by its shareholders. D. A limited liability company is not taxed as a separate entity.Answer: CShort Answer Questions1.What is the definition of accounting? Accounting is theprocess of identifying, measuring, and communicating economicinformation to permit informed judgments and decisions by users of the information.2.What are the three primary financial statements produced byaccounting? The three primary financial statements produced byaccounting are the balance sheet, income statement, and cash flow statement.Chapter 2Multiple Choice Questions1.A transaction that increases an asset and decreases aliability is called a(n) A. expense. B. revenue. C. equity. D.none of the above.Answer: D2.Which of the following is an example of a prepd expense? A.Rent pd in advance B. Money borrowed from a bank C. Interest on a loan D. Salary pd to an employeeAnswer: AShort Answer Questions1.What is the purpose of the accounting equation? The purposeof the accounting equation is to show the relationship between a company’s assets, liabilities, and equity.2.What is the difference between an asset and a liability? Anasset is something that a company owns and has value, while a liability is something that a company owes to someone else. Chapter 3Multiple Choice Questions1.What is the difference between a perpetual inventory systemand a periodic inventory system? A. A perpetual inventory systemis based on physical counts of inventory, while a periodicinventory system is based on estimates of inventory levels. B. A perpetual inventory system updates inventory records continuously, while a periodic inventory system updates inventory records only periodically. C. A perpetual inventory system is used only bylarge companies, while a periodic inventory system is used bysmall companies. D. A perpetual inventory system is necessary for accurate financial statements, while a periodic inventory system is not.Answer: B2.When inventory is sold on credit, which accounts areaffected? A. The sales account and the cost of goods sold account.B. The accounts receivable account and the cost of goods soldaccount. C. The sales account and the inventory account. D. The accounts receivable account and the inventory account.Answer: BShort Answer Questions1.What is gross profit? Gross profit is the difference betweena company’s sales revenue and cost of goods sold.2.What is the difference between FIFO and LIFO? FIFO (First In,First Out) assumes that the first items purchased are the first items sold, while LIFO (Last In, First Out) assumes that the last items purchased are the first items sold.。
Principles of Corporate Finance 英文第十版习题解答Chap001
CHAPTER 1Goals and Governance of the FirmAnswers to Problem Sets1. a. realb. executive airplanesc. brand namesd. financiale. bondsf. investmentg. capital budgetingh. financing2. c, d, e, and g are real assets. Others are financial.3. a. Financial assets, such as stocks or bank loans, are claims held byinvestors. Corporations sell financial assets to raise the cash to invest inreal assets such as plant and equipment. Some real assets are intangible.b. Capital budgeting means investment in real assets. Financing meansraising the cash for this investment.c. The shares of public corporations are traded on stock exchanges and canbe purchased by a wide range of investors. The shares of closely heldcorporations are not traded and are not generally available to investors.d. Unlimited liability: investors are responsible for all the firm’s debts. A soleproprietor has unlimited liability. Investors in corporations have limitedliability. They can lose their investment, but no more.e. A corporation is a separate legal “person” with unlimited life. Its ownershold shares in the business. A partnership is a limited-life agreement toestablish and run a business.4. c, d.5. b, c.6. Separation of ownership and management typically leads to agency problems,where managers prefer to consume private perks or make other decisions fortheir private benefit -- rather than maximize shareholder wealth.7. a. Assuming that the encabulator market is risky, an 8% expected return onthe F&H encabulator investments may be inferior to a 4% return on U.S.government securities.b. Unless their financial assets are as safe as U.S. government securities,their cost of capital would be higher. The CFO could consider what theexpected return is on assets with similar risk.8. Shareholders will only vote for (a) maximize shareholder wealth. Shareholderscan modify their pattern of consumption through borrowing and lending, matchrisk preferences, and hopefully balance their own checkbooks (or hire a qualified professional to help them with these tasks).9. If the investment increases the firm’s wealth, it will increase the value of the firm’sshares. Ms. Espinoza could then sell some or all of these more valuable shares in order to provide for her retirement income.10. As the Putnam example illustrates, the firm’s value typically falls by significantlymore than the amount of any fines and settlements. The firm’s reput ation suffers in a financial scandal, and this can have a much larger effect than the fines levied.Investors may also wonder whether all of the misdeeds have been contained. 11. Managers would act in shareholders’ interests because they have a legal dut y toact in their interests. Managers may also receive compensation, either bonusesor stock and option payouts whose value is tied (roughly) to firm performance.Managers may fear personal reputational damage that would result from notacting in shareho lders’ interests. And m anagers can be fired by the board ofdirectors, which in turn is elected by shareholders. If managers still fail to act inshareholders’ interests, shareholders may sell their shares, lowering the stockprice, and potentially creating the possibility of a takeover, which can again lead tochanges in the board of directors and senior management.12. Managers that are insulated from takeovers may be more prone to agencyproblems and therefore more likely to act in their own interests rather than in shareholders’. If a firm instituted a new takeover defense, we might expect to see the value of its shares decline as agency problems increase and lessshareholder value maximization occurs. The counterargument is that defensive measures allow managers to negotiate for a higher purchase price in the face of a takeover bid – to the benefit of shareholder value.Appendix Questions :1. Both would still invest in their friend’s business. A invests and receives $121,000for his investment at the end of the year (which is greater than the $120,000 it would receive from lending at 20%). G also invests, but borrows against the $121,000 payment, and thus receives $100,833 today.2. a. He could consume up to $200,000 now (foregoing all future consumption) orup to $216,000 next year (200,000*1.08, foregoing all consumption this year). To choose the same consumption (C) in both years, C = (200,000 – C) x 1.08 or C = $103,846.203,704200,000220,000216,000Dollars Next YearDollars Nowb. He should invest all of his wealth to earn $220,000 next year. If he consumesall this year, he can now have a total of $203,703.7 (200,000 x 1.10/1.08) this year or $220,000 next year. If he consumes C this year, the amount available for next year’s consumption is (203,703.7 – C) x 1.08. To get equal consumption in both years, set the amount consumed today equal to the amount next year:C = (203,703.7 – C) x 1.08C = $105,769.2。
Principles of Corporate Finance 英文第十版习题解答Chap005
CHAPTER 5Net Present Value and Other Investment CriteriaAnswers to Problem Sets1. a. A = 3 years, B = 2 years, C = 3 yearsb. Bc. A, B, and Cd. B and C (NPV B = $3,378; NPV C = $2,405)e. Truef. It will accept no negative-NPV projects but will turn down some withpositive NPVs. A project can have positive NPV if all future cash flows areconsidered but still do not meet the stated cutoff period.2. Given the cash flows C0, C1, . . . , C T, IRR is defined by:It is calculated by trial and error, by financial calculators, or by spreadsheetprograms.3. a. $15,750; $4,250; $0b. 100%.4. No (you are effectively “borrowing” at a rate of interest highe r than theopportunity cost of capital).5. a. Twob. -50% and +50%c. Yes, NPV = +14.6.6. The incremental flows from investing in Alpha rather than Beta are -200,000;+110,000; and 121,000. The IRR on the incremental cash flow is 10% (i.e., -200 + 110/1.10 + 121/1.102 = 0). The IRR on Beta exceeds the cost of capital and so does the IRR on the incremental investment in Alpha. Choose Alpha.7. 1, 2, 4, and 68. a. $90.91.10)(1$10001000NP V A -=+-=$$4,044.7310)(1.$1000(1.10)$1000(1.10)$4000(1.10)$1000(1.10)$10002000NP V 5432B +=+++++-=$$39.4710)(1.$1000.10)(1$1000(1.10)$1000(1.10)$10003000NP V 542C +=++++-=$ b.Payback A = 1 year Payback B = 2 years Payback C = 4 years c. A and Bd.$909.09.10)(1$1000P V 1A ==The present value of the cash inflows for Project A never recovers the initial outlay for the project, which is always the case for a negative NPV project. The present values of the cash inflows for Project B are shown in the third row of the table below, and the cumulative net present values are shown in the fourth row:C 0 C 1C 2C 3C 4C 5-2,000.00 +1,000.00 +1,000.00 +4,000.00 +1,000.00 +1,000.00-2,000.00909.09 826.45 3,005.26 683.01 620.92-1,090.91 -264.46 2,740.803,423.81 4,044.73Since the cumulative NPV turns positive between year two and year three,the discounted payback period is:years 2.093,005.26264.462=+The present values of the cash inflows for Project C are shown in the third row of the table below, and the cumulative net present values are shown in the fourth row:C 0C 1C 2C 3 C 4C 5-3,000.00 +1,000.00 +1,000.00 0.00 +1,000.00 +1,000.00-3,000.00 909.09 826.450.00 683.01 620.92 -2,090.91 -1,264.46-1,264.46-581.45 39.47Since the cumulative NPV turns positive between year four and year five,the discounted payback period is:years 4.94620.92581.454=+e. Using the discounted payback period rule with a cutoff of three years, the firm would accept only Project B.9. a.When using the IRR rule, the firm must still compare the IRR with the opportunity cost of capital. Thus, even with the IRR method, one must specify the appropriate discount rate.b.Risky cash flows should be discounted at a higher rate than the rate used to discount less risky cash flows. Using the payback rule is equivalent to using the NPV rule with a zero discount rate for cash flows before the payback period and an infinite discount rate for cash flows thereafter. 10.The two IRRs for this project are (approximately): –17.44% and 45.27% Between these two discount rates, the NPV is positive. 11.a.The figure on the next page was drawn from the following points: Discount Rate0% 10% 20%NPV A +20.00 +4.13 -8.33 NPV B +40.00 +5.18 -18.98b.From the graph, we can estimate the IRR of each project from the point where its line crosses the horizontal axis:IRR A = 13.1% and IRR B = 11.9%c. The company should accept Project A if its NPV is positive and higherthan that of Project B; that is, the company should accept Project A if thediscount rate is greater than 10.7% (the intersection of NPV A and NPV B on the graph below) and less than 13.1%.d. The cash flows for (B – A) are:C0 = $ 0C1 = –$60C2 = –$60C3 = +$140Therefore:Discount Rate0% 10% 20%NPV B-A +20.00 +1.05 -10.65IRR B-A = 10.7%The company should accept Project A if the discount rate is greater than10.7% and less than 13.1%. As shown in the graph, for these discountrates, the IRR for the incremental investment is less than the opportunitycost of capital.12. a.Because Project A requires a larger capital outlay, it is possible that Project A has both a lower IRR and a higher NPV than Project B. (In fact, NPV A is greater than NPV B for all discount rates less than 10 percent.) Because the goal is to maximize shareholder wealth, NPV is the correct criterion.b.To use the IRR criterion for mutually exclusive projects, calculate the IRR for the incremental cash flows:C 0C 1C 2IRRA -B -200 +110 +121 10%Because the IRR for the incremental cash flows exceeds the cost of capital, the additional investment in A is worthwhile.c.81.86$(1.09)$3001.09$250400NPV 2A =++-=$ $79.10(1.09)$1791.09$140200NPV 2B =++-=$ 13.Use incremental analysis:C 1C 2 C 3Current arrangement -250,000 -250,000 +650,000 Extra shift -550,000 +650,000 0 Incremental flows -300,000+900,000 -650,000The IRRs for the incremental flows are (approximately): 21.13% and 78.87% If the cost of capital is between these rates, Titanic should work the extra shift.14. a..82010,0008,18210,000)( 1.1020,00010,000PI D ==--+-=.59020,00011,81820,000)( 1.1035,00020,000PI E ==--+-=b.Each project has a Profitability Index greater than zero, and so both areacceptable projects. In order to choose between these projects, we must use incremental analysis. For the incremental cash flows:0.3610,0003,63610,000)( 1.1015,00010,000PI D E ==--+-=-The increment is thus an acceptable project, and so the larger project should be accepted, i.e., accept Project E. (Note that, in this case, the better project has the lower profitability index.)15.Using the fact that Profitability Index = (Net Present Value/Investment), we find:Project Profitability Index 1 0.22 2 -0.02 3 0.17 4 0.14 5 0.07 6 0.18 70.12Thus, given the budget of $1 million, the best the company can do is to acceptProjects 1, 3, 4, and 6.If the company accepted all positive NPV projects, the market value (compared to the market value under the budget limitation) would increase by the NPV of Project 5 plus the NPV of Project 7: $7,000 + $48,000 = $55,000Thus, the budget limit costs the company $55,000 in terms of its market value. 16.The IRR is the discount rate which, when applied to a project’s cash flows, yields NPV = 0. Thus, it does not represent an opportunity cost. However, if eachproject’s cash flows could be invested at that project’s IRR, then the NPV of each project would be zero because the IRR would then be the opportunity cost of capital for each project. The discount rate used in an NPV calculation is the opportunity cost of capital. Therefore, it is true that the NPV rule does assume that cash flows are reinvested at the opportunity cost of capital.17.a.C 0 = –3,000 C 0 = –3,000 C 1 = +3,500 C 1 = +3,500 C 2 = +4,000 C 2 + PV(C 3) = +4,000 – 3,571.43 = 428.57 C 3 = –4,000 MIRR = 27.84%b.2321 1.12C 1.12xC xC -=+(1.122)(xC 1) + (1.12)(xC 2) = –C 3 (x)[(1.122)(C 1) + (1.12C 2)] = –C 3)()21231.12C )(C (1.12C -x +=0.4501.12)(4,00)(3,500(1.124,000x 2=+=)()0IRR)(1x)C -(1IRR)(1x)C -(1C 2210=++++0IRR)(10)0.45)(4,00-(1IRR)(10)0.45)(3,50-(13,0002=++++- Now, find MIRR using either trial and error or the IRR function (on afinancial calculator or Excel). We find that MIRR = 23.53%.It is not clear that either of these modified IRRs is at all meaningful.Rather, these calculations seem to highlight the fact that MIRR really has no economic meaning.18.Maximize: NPV = 6,700x W + 9,000x X + 0X Y – 1,500x Z subject to:10,000x W + 0x X + 10,000x Y + 15,000x Z ≤ 20,000 10,000x W + 20,000x X – 5,000x Y – 5,000x Z ≤ 20,000 0x W - 5,000x X – 5,000x Y – 4,000x Z ≤ 20,000 0 ≤ x W ≤ 1 0 ≤ x X ≤ 1 0 ≤ x Z ≤ 1Using Excel Spreadsheet Add-in Linear Programming Module:Optimized NPV = $13,450with x W = 1; x X = 0.75; x Y = 1 and x Z = 0If financing available at t = 0 is $21,000:Optimized NPV = $13,500with x W = 1; x X = (23/30); x Y = 1 and x Z = (2/30)Here, the shadow price for the constraint at t = 0 is $50, the increase in NPV for a $1,000 increase in financing available at t = 0.In this case, the program viewed x Z as a viable choice even though the NPV of Project Z is negative. The reason for this result is that Project Z provides a positive cash flow in periods 1 and 2.If the financing available at t = 1 is $21,000:Optimized NPV = $13,900with x W = 1; x X = 0.8; x Y = 1 and x Z = 0Hence, the shadow price of an additional $1,000 in t =1 financing is $450.。
高级会计学(第10版)习题答案 ch21_Beams10e_sm
Chapter 21ACCOUNTING FOR NOT-FOR_PROFIT ORGANIZATIONSQuestions1 The financial statements required for nongovernmental not-for-profit entities include a statement offinancial position, a statement of activities, and a cash flow statement. Voluntary health and welfare organizations also provide a statement of functional expenses.2 Each hospital, college, and voluntary health and welfare organization (and other not-for-profitorganizations as well) must be evaluated to determine whether it meets the definition of a government in the authoritative literature. Those that meet the definition of a government must apply the government GAAP hierarchy. GASB standards are the most authoritative guidance for these entities. All other entities are to apply FASB standards.3 A conditional promise to give depends on the occurrence of a specified future and uncertain event to bindthe promisor. An unconditional promise to give depends only on the passage of time or demand by the promisee for performance.Organizations recognize conditional promises to give as contribution revenue and receivables when the conditions are substantially met (in other words, when the conditional promise to give becomes unconditional); however, they account for a conditional gift of cash or other asset that may have to be returned to the donor if the condition is not met as a refundable advance (liability). Organizations recognize unconditional promises to give as restricted or unrestricted contribution revenue and receivables in the period in which the promise is received.4 A donor-imposed condition provides that the donor will have his resources returned (or will be releasedfrom the promise to give) if the condition is not met. A donor-imposed restriction only limits the purpose or timing of use of the contributed assets.5 Unconditional promises to give with payments due in the next period are reported as restricted support (netof an appropriate allowance for uncollectible accounts) that increase temporarily restricted net assets, even if the resources are not restricted for specific purposes.6 When a time restriction is met, temporarily restricted net assets are reclassified as unrestricted net assets.The entry includes a debit to temporarily restricted net assets—reclassifications out and a credit to unrestricted net assets—reclassifications in. (Different account titles, such as amounts released from restrictions, are permitted as well.)7 Gifts in kind are reported as unrestricted support that increases unrestricted net assets if the not-for-profitentity has discretion over the disposition of the resources and a fair value can be reasonably determined. If fair value cannot be determined, the items are recorded as sales revenue when they are sold. If the not-for-profit entity has little or no discretion over disposition of the items, the gifts in kind should be accounted for as agency transactions.8 Program services of voluntary health and welfare organizations are expenses incurred in meeting the socialservice objectives of the organization. Examples are research, public education, community services, and patient services. Supporting services consist of the organization’s administrative and fund-raising costs, and expenses for these items are so classified in the statement of activities.9The statement of functional expenses for voluntary health and welfare organizations is intended to reconcile the functional classification of expenses (which results in highly aggregated data) with basic object-of-expenditure classifications that are less aggregated and easier for many users to understand.© 2009 Pearson Education, Inc. publishing as Prentice Hall21-210 Contributed services are recognized only if the services (a) create or enhance nonfinancial assets of theorganization or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation.11 Charity care is excluded from both gross patient service revenue and from expense. The hospital’s policyfor providing charity care and the level of charity care provided are disclosed in notes to the financial statements.12 Net patient service revenues of hospitals are measured by deducting courtesy allowances and contractualadjustments from gross patient revenues. Uncollectible accounts expenses are not deducted in computing net patient service revenues. Net patient service revenues are reported in the statement of activities.13 The three major revenue groupings used by hospitals are patient service revenues, other operating revenue,and nonoperating gains. Examples are:Patient service revenues—routine care, emergency room, recovery room, pharmacyOther operating revenues—tuition from educational programs, research grants for specific purposes, gift shop salesNonoperating gains—unrestricted gifts, unrestricted endowment income, gain on sale of plant assets, rents from property not used in hospital operations(Premium fees also are significant for many hospitals today. They would be reported as a separate line item under operating revenues.)14 Both the provision for bad debts (other than for charity care, which is not recorded as revenue) anddepreciation are expenses of a hospital. Hospitals use full accrual accounting procedures.15 FASB Statement No. 117 requires private not-for-profit universities to provide a set of financial statementsthat includes a statement of financial position, statement of activities, statement of cash flows, and accompanying notes. Governmental universities are considered special-purpose governments under GASB Statements No. 34 and 35. Special-purpose governments with more than one governmental program or both governmental and business-type activities present both government-wide and fund financial statements, as well as the MD&A, notes, and required supplementary information. Special-purpose governments with only one governmental program may combine fund and government-wide statements, whereas those with only business-type activities should report only the financial statements required for enterprise funds, as well as the MD&A, notes, and required supplementary information.16 Government colleges and universities no longer have the option of using the AICPA college guide;however, many organizations may have retained AICPA model features for internal accounting and control purposes.17 Much guidance comes from the Financial Accounting and Reporting Manual, an accounting manualprepared by the National Association of College and University Business Officers (NACUBO) which is available as an online subscription service.18 GASB Statements No. 34 and 35 require special-purpose government with more than one governmentalprogram or both governmental and business-type activities to present both government-wide and fund financial statements, as well as the MD&A, notes, and required supplementary information. Special-purpose governments with only one governmental program may combine fund and government-wide statements, whereas those with only business-type activities should report only the financial statements required for enterprise funds, as well as the MD&A, notes and required supplementary information.21-3 19 Functional classifications include the following:• Instruction. Expenses for the educational programs• Resource. Expenses to produce research outcome• Public Service. Expenses for activities to provide noninstructional services to external groups• Academic support. Expenses to provide support for instruction, research, and publications•Student Services. Amounts expended for admissions and registrar, and amounts expended for students’ emotional, social, and physical well-being•Institutional support. Amounts expended for administration and the long-range planning of the university• Operation and maintenance of plant. Expenses for operating and maintaining the physical plant (net of amounts to auxiliary enterprises and university hospitals)• Student aid. Expenses from restricted or unrestricted funds in the form of grants, scholarships, or fellowships to students.20 Property, plant, and equipment acquired by a not-for-profit organization with unrestricted or restrictedresources may be recorded at acquisition as unrestricted or temporarily restricted. If temporarily restricted, the assets are reclassified when depreciation is recognized.EXERCISESE21-1E21-2E21-31d1b 1 b2a2a2 b3d3d3 c4c4b4 d5b5c5 aE21-4E21-5E21-61a1 b 1 b2b2b2 a3a3c3 a4a4 c 4 c5c5d5 bE21-71b2a3c4a5dE21-8Program services:Education $20,400Public Health 15,700Research 12,000 $48,100Supporting services:Fund raising $11,400Management and general 5,500 $16,90021-4E21-9Contributions that are not due until the next period imply a time restriction unless the donor explicitly stipulates that the pledge is for current expenditures. Thus, unrestricted net assets are increased by $13,580 and temporarily restricted net assets are increased by $5,820.restriction is met in the same period.)The organization may also adopt an accounting policy that implies a time restriction that expires over the useful life of the donated asset. If the gift is reported as restricted support in temporarily restricted net assets, depreciation is recorded as an expense in unrestricted net assets, which results in a reclassification for the amount of the depreciation from temporarily restricted to unrestricted net assets.The contribution of cash restricted for long-lived asset purchases increased temporarily restricted net assets, as did the donor-restricted investment income on those funds.PROBLEMS P21-121-6P21-2program services.services.services.services.to program services.21-7 Gifts in kind are reported as contributions since Share Shop has discretion over their distribution and a fair value is determinable. When gifts in kind are distributed to recipients, they are recorded as program expenses. If fair value cannot be determined, neither the contribution nor distribution would be recorded.Unconditional promises to give (solution assumes all pledges were due in 2008)pledges, and reclassify uncollected support.21-8P21-3Hometown Memorial HospitalStatement of OperationsFor the year ended December 31, 200721-9 P21-421-10Nongovernmental NFP CollegeStatement of Activitiesfor the year 200XCommunity SocietyStatement of ActivitiesFor the Year Ended December 31, 2008P21-7* To the extent that pledges are not collected by year end a time restriction will be implied. An adjusting entry reducing unrestricted support and recording temporarily restricted support for the net realizablevalue of the uncollected pledges will be required.* ($8,000 + 70,000 + [27,000 – 5,000 account increase])Solution P21-8。
Principles of Corporate Finance 英文第十版习题解答Chap007
CHAPTER 7Introduction to Risk and ReturnAnswers to Problem Sets1. Expected payoff is $100 and expected return is zero. Variance is 20,000 (%squared) and standard deviation is 141%.2. a. Standard deviation = 19.3%b. Average real return = -2.2%3. Ms. Sauros had a slightly higher average return (14.6% vs. 14.4% for the market).However, the fund also had a higher standard deviation (13.6% vs. 9.4% for themarket).4. a. Falseb. Truec. Falsed. Falsee. Falsef. Trueg. Trueh. False5. d6.7. a. 26% b. zero c. .75d. L ess than 1.0 (the portfolio’s risk is the same as the market, but some ofthis risk is unique risk).8. 1.3 (Diversification does not affect market risk.) 9. A, 1.0; B, 2.0; C, 1.5; D, 0; E, 21.0 10.Recall from Chapter 4 that:(1 + r nominal ) = (1 + r real ) ⨯ (1 + inflation rate)Therefore:r real = [(1 + r nominal )/(1 + inflation rate)] – 1a.The real return on the stock market in each year was: 1929: -14.7% 1930: -23.7% 1931: -38.0% 1932: 0.5% 1933:56.5%b. From the results for Part (a), the average real return was: -3.89%c.The risk premium for each year was: 1929: -19.3% 1930: -30.7% 1931: -45.0% 1932: -10.9% 1933:57.0%d. From the results for Part (c), the average risk premium was: –9.78%e.The standard deviation (σ) of the risk premium is calculated as follows:[22220.0978))0.450(0978))0 0.307(0.0978))0.193(151σ---+---+---⨯⎪⎪⎭⎫ ⎝⎛-=(.((0.1557390.0978))(0.5700.0978))0.109(22=--+---+]((39.46%0.3946370.155739σ===11.a.A long-term United States government bond is always absolutely safe in terms of the dollars received. However, the price of the bond fluctuates as interest rates change and the rate at which coupon payments received can be invested also changes as interest rates change. And, of course, the payments are all in nominal dollars, so inflation risk must also be considered.b.It is true that stocks offer higher long-run rates of return than do bonds, but it is also true that stocks have a higher standard deviation of return. So, which investment is preferable depends on the amount of risk one iswilling to tolerate. This is a complicated issue and depends on numerous factors, one of which is the investment time horizon. If the investor has a short time horizon, then stocks are generally not preferred.c. Unfortunately, 10 years is not generally considered a sufficient amount of time for estimating average rates of return. Thus, using a 10-year average is likely to be misleading.12.The risk to Hippique shareholders depends on the market risk, or beta, of the investment in the black stallion. The information given in the problem suggests that the horse has very high unique risk, but we have no information regarding the horse’s market risk. So, the best estimate is that t his horse has a market risk about equal to that of other racehorses, and thus this investment is not a particularly risky one for Hippique shareholders.13.In the context of a well-diversified portfolio, the only risk characteristic of a single security that matters is the security’s contribution to the overall portfolio risk. This contribution is measured by beta. Lonesome Gulch is the safer investment for a diversified investor because its beta (+0.10) is lower than the beta ofAmalgamated Copper (+0.66). For a diversified investor, the standard deviations are irrelevant. 14.x I = 0.60 σI = 0.10 x J = 0.40 σJ = 0.20a.1ρIJ =)]σσρx 2(x σx σx [σJ I IJ J I 2J 2J 2I 2I 2p ++=b.c. 15.a.Refer to Figure 7.13 in the text. With 100 securities, the box is 100 by 100. The variance terms are the diagonal terms, and thus there are 100variance terms. The rest are the covariance terms. Because the box has (100 times 100) terms altogether, the number of covariance terms is:1002 – 100 = 9,900Half of these terms (i.e., 4,950) are different.b.Once again, it is easiest to think of this in terms of Figure 7.13. With 50 stocks, all with the same standard deviation (0.30), the same weight in the portfolio (0.02), and all pairs having the same correlation coefficient (0.40), the portfolio variance is:σ2 = 50(0.02)2(0.30)2 + [(50)2 – 50](0.02)2(0.40)(0.30)2 =0.03708 σ = 0.193 = 19.3%c.For a fully diversified portfolio, portfolio variance equals the average covariance:σ2 = (0.30)(0.30)(0.40) = 0.036 σ = 0.190 = 19.0%16.a.Refer to Figure 7.13 in the text. For each different portfolio, the relative weight of each share is [one divided by the number of shares (n) in the portfolio], the standard deviation of each share is 0.40, and the correlation between pairs is 0.30. Thus, for each portfolio, the diagonal terms are the same, and the off-diagonal terms are the same. There are n diagonal terms and (n 2 – n) off-diagonal terms. In general, we have:Variance = n(1/n)2(0.4)2 + (n 2 – n)(1/n)2(0.3)(0.4)(0.4)0.0196]0)(0.20)40)(1)(0.12(0.60)(0.(0.20)0.40)((0.10)(0.60)[2222=++=0ρij=0.0148])0.10)(0.2040)(0.50)(2(0.60)(0.(0.20)0.40)((0.10)(0.60)[2222=++=0.50ρIJ =0.0100]0)(0.20)40)(0)(0.12(0.60)(0.(0.20)0.40)((0.10)(0.60)[2222=++=)]σσρx 2(x σx σx [σJ I IJ J I 2J 2J 2I 2I 2p ++=)]σσρx 2(x σx σx [σJ I IJ J I 2J 2J 2I 2I 2p ++=For one share: Variance = 1(1)2(0.4)2 + 0 = 0.160000For two shares:Variance = 2(0.5)2(0.4)2 + 2(0.5)2(0.3)(0.4)(0.4) = 0.104000 The results are summarized in the second and third columns of thetable below.b. (Graphs are on the next page.) The underlying market risk that can not bediversified away is the second term in the formula for variance above:Underlying market risk = (n2 - n)(1/n)2(0.3)(0.4)(0.4)As n increases, [(n2 - n)(1/n)2] = [(n-1)/n] becomes close to 1, so that theunderlying market risk is: [(0.3)(0.4)(0.4)] = 0.048c. This is the same as Part (a), except that all of the off-diagonal terms arenow equal to zero. The results are summarized in the fourth and fifthcolumns of the table below.(Part a) (Part a) (Part c) (Part c)No. of Standard StandardShares Variance Deviation Variance Deviation1 .160000 .400 .160000 .4002 .104000 .322 .080000 .2833 .085333 .292 .053333 .2314 .076000 .276 .040000 .2005 .070400 .265 .032000 .1796 .066667 .258 .026667 .1637 .064000 .253 .022857 .1518 .062000 .249 .020000 .1419 .060444 .246 .017778 .13310 .059200 .243 .016000 .126Graphs for Part (a):Graphs for Part (c):17. The table below uses the format of Figure 7.13 in the text in order to calculate theportfolio variance. The portfolio variance is the sum of all the entries in the matrix. Portfolio variance equals: 0.03664355518.“Safest” means lowest risk; in a portfolio context, thi s means lowest variance of return. Half of the portfolio is invested in Canadian Pacific stock, and half of the portfolio must be invested in one of the other securities listed. Thus, we calculate the portfolio variance for seven different portfolios to see which is the lowest. The safest attainable portfolio is comprised of Canadian Pacific and Nestle.19.⨯ change inchange is +1.25%.b. “Safest” implies lowest risk. Assuming the well-diversified portfolio isinvested in typical securities, the portfolio beta is approximately one. Thelargest reduction in beta is achieved by investing the $20,000 in a stockwith a negative beta. Answer (iii) is correct.20. Expected portfolio return = x A E[R A ] + x B E[R B ] = 12% = 0.12Let x B = (1 – x A )x A (0.10) + (1 – x A) (0.15) = 0.12 ⇒ x A = 0.60 and x B = 1 – x A = 0.40Portfolio variance = x A2σA2 + x B2σB2 +2(x A x B ρAB σA σB )= (0.60 2 ) (20 2 ) + (0.40 2 ) (40 2 ) + 2(0.60)(0.40)(0.50)(20)(40) = 592 Standard deviation = 24.33%592σ==21. a. In general:Portfolio variance = σP2 = x12σ12 + x22σ22 + 2x1x2ρ12σ1σ2Thus:σP2 = (0.52)(30.92)+(0.52)(17.22)+2(0.5)(0.5)(0.31)(30.9)(17.2)σP2 = 395.942Standard deviation = σP = 19.88%b. We can think of this in terms of Figure 7.13 in the text, with threesecurities. One of these securities, T-bills, has zero risk and, hence, zerostandard deviation. Thus:σP2 = (1/3)2(30.92)+(1/3)2(17.22)+2(1/3)(1/3)(0.31)(30.9)(17.2)σP2 = 175.574Standard deviation = σP = 13.25%Another way to think of this portfolio is that it is comprised of one-thirdT-Bills and two-thirds a portfolio which is half Dell and half McDonalds.Because the risk of T-bills is zero, the portfolio standard deviation is two-thirds of the standard deviation computed in Part (a) above:Standard deviation = (2/3)(19.88) = 13.25%c. With 50% margin, the investor invests twice as much money in theportfolio as he had to begin with. Thus, the risk is twice that found in Part(a) when the investor is investing only his own money:Standard deviation = 2 ⨯ 19.88% = 39.76%d. With 100 stocks, the portfolio is well diversified, and hence the portfoliostandard deviation depends almost entirely on the average covariance ofthe securities in the portfolio (measured by beta) and on the standarddeviation of the market portfolio. Thus, for a portfolio made up of 100stocks, each with beta = 1.41, the portfolio standard deviation isapproximately: 1.41 ⨯ 15% = 21.15%For stocks like McDonalds, it is: 0.77 ⨯ 15% = 11.55%22. For a two-security portfolio, the formula for portfolio risk is:Portfolio variance = x12σ12 + x22σ22 + 2x1x2ρρ12σ1σ2If security one is Treasury bills and security two is the market portfolio, then σ1 is zero, σ2 is 20%. Therefore:Portfolio variance = x22σ22 = x22(0.20)2Standard deviation = 0.20x2Portfolio expected return = x1(0.06) + x2(0.06 + 0.85)Portfolio expected return = 0.06x1 + 0.145x2Portfolio X1X2ExpectedReturnStandardDeviation1 1.0 0.0 0.060 0.0002 0.8 0.2 0.077 0.0403 0.6 0.4 0.094 0.0804 0.4 0.6 0.111 0.1205 0.2 0.8 0.128 0.1606 0.0 1.0 0.145 0.20023. The matrix below displays the variance for each of the eight stocks along thediagonal and each of the covariances in the off-diagonal cells:The covariance of BP with the market portfolio (σBP, Market) is the mean of the eight respective covariances between BP and each of the eight stocks in the portfolio. (The covariance of BP with itself is the variance of BP.) Therefore, σBP, Market is equal to the average of the eight covariances in the first row or, equivalently, the average of the eight covariances in the first column. Beta for BP is equal to the covariance divided by the market variance, which we calculated at 0.03664 in problem 17. The covariances and betas are displayed in the table below:。
高级会计学(第10版)教师手册 Beams10e_IM01
Chapter 1BUSINESS COMBINATIONSChapter OutlineA BUSINESS COMBINATION IS THE UNION OF PREVIOUSLY SEPARATE BUSINESS ENTITIES.A Horizontal integration is the combination of firms in the same business lines andmarkets.B Vertical integration is the combination of firms in the same business, but withoperations in different, successive, stages of production and/or distribution.C Conglomeration is the combination of firms with unrelated and diverse productsand/or service functions.D Reasons companies chose to expand through combination rather than by building newfacilities include1May be less expensive to acquire rather than build facilities or develop R&D2May be less risky to acquire product lines or markets rather than develop new products, particularly if the goal is to diversify3Operating delays are lessened since the facilities are in place, therebyshortening the time to market4 A small company’s growth may lessen its chances of being the target of atakeover5Acquisition of intangible assets, tax advantages, and various other reasons6Just being “big”ANTITRUST LAWS PROHIBIT BUSINESS COMBINATIONS THAT WOULD BE IN RESTRAINT OF TRADE OR WOULD IMPAIR COMPETITION.A Proposed business combinations are reviewed by federal agencies such as theJustice Department, the Federal Trade Commission, the Federal Reserve Board, the Department of Transportation, and the Securities and Exchange Commission.B State agencies review business combinations for possible violations of state statutes.C Watch for a tendency to lessen competition.DEFINITIONS:A Acquisition occurs when:©2009 Pearson Education, Inc. publishing as Prentice Hall 11One corporation acquires the productive assets of another business entity and integrates those assets into its own operations (see B & C below), or 2One corporation obtains operating control over the productive facilities of another entity by acquiring a majority of its outstanding voting stock.A +B = A + B (usually requires consolidated statements)B Merger, in a technical sense, occurs when one corporation takes over all theoperations of another business entity and that entity is dissolved (see Illustration 1-1).1 A + B = AC Consolidation, in a technical sense, occurs when a new corporation is formed to takeover the assets and operations of two or more separate business entities and all the combining companies are dissolved (see Illustration 1-1).1 A + B = CD Business combination, as an accounting concept, occurs when a corporation and oneor more incorporated or unincorporated businesses are brought together underthe control of a single management team. That control is established when:1 One corporation becomes a subsidiary (i.e., when another corporation acquires acontrolling interest of its outstanding voting stock),2 One company transfers its net assets to another, or3 Each company transfers its net assets to a newly formed corporation.E Merger, consolidation, and acquisition are often used in a generic sense as synonyms forbusiness combinations. The term "consolidation" also refers to the accountingprocess of combining a parent company’s financial statements with those of itssubsidiaries.FASB STATEMENT 141, BUSINESS COMBINATIONS, REVISES THE REQUIREMENTS FOR ACCOUNTING FOR BUSINESS COMBINATIONS.A Major conclusions – In May, 2001, the FASB issued Statement 141 which reaffirmedthe business combination concept with the following exception:1 The pooling of interest method of accounting was eliminated for alltransactions initiated after June 30, 2001.©2009 Pearson Education, Inc. publishing as Prentice Hall 22 Prior combinations accounted for by the pooling of interests method will beallowed to continue as acceptable financial reporting practice for past businesscombinations.3 FASB Statement 141 makes U. S. GAAP more consistent with internationalaccounting standards. Most major economies, including France, Japan, andGermany prohibit the use of pooling of interests accountingB Application of the purchase method:1 In a purchase business combination, cost is measured by the cash disbursed,the fair value of property given up, or the fair value of securities issued.2 Direct costs of acquisition:a Direct costs of registering and issuing securities are charged againstadditional paid-in capital.b Other direct costs of combining are expensed.c Costs to close duplicate facilities, and other indirect costs are expensed.3Cost allocation proceduresa Determine the fair values of all identifiable tangible and intangibleassets acquired and liabilities assumed.b FASB Statement 141 provides specific guidelines for valuing assets andliabilities.c All identifiable assets and liabilities are valued regardless of whetherthey are recorded on the books of the acquired company (for examplea patent where all R&D was expensed as incurred).d Defined benefit pension plans should require a liability (projected benefitobligation in excess of plan assets) or an asset (amount of plan assets inexcess of the projected benefit obligation).e No value is assigned to goodwill recorded on the books of the acquiredcompany.4 The acquiring company records the assets received and liabilities assumed attheir fair values.©2009 Pearson Education, Inc. publishing as Prentice Hall 3a First, fair values are assigned to all identifiable tangible andintangible assets acquired and liabilities assumed.(1)See text Exhibit 1-2 for a list of intangible assets that meet thecriteria for recognition. Intangible assets must meet either aseparability or a contractual-legal criterion.b If cost is greater than fair value of the identifiable net assets acquired, theexcess cost is assigned to goodwill.c If fair value is greater than cost, the excess fair value is handled in thefollowing fashion:(1)Under previous rules the excess is applied as a pro rata reductionof amounts that would have otherwise been assigned to assetsexcept for financial assets other than investments accounted for bythe equity method, assets to be disposed of, deferred tax assets,prepaid pension and post-retirement assets, and any other currentassets.(2)If all such assets are reduced to zero value, the reminder, if any, isrecognized as an extraordinary gain.(3)Under new rules, the prorated reduction in number (1) does not applyand the rule in number (2) does not apply, instead after review of allthe relevant information the amount is handled as a gain.5 Contingent Consideration in a Purchase Business Combinationa Contingent consideration is an additional payment made to theprevious stockholders of the acquired company contingent on futureevents or transactions. The contingent consideration may include thedistribution of cash, other assets, or the issuance of debt or equitysecurities.b Contingent consideration that is determinable at the date of acquisitionis recorded as part of the cost of the combination.c Contingent consideration that is not determinable at the date ofacquisition is recorded when the contingency is resolved and theconsideration is issued or becomes issuable.©2009 Pearson Education, Inc. publishing as Prentice Hall 4d A contingency involving future earnings levels is recognized at fairmarket value as an additional cost of the acquired company. This istypically recognized as goodwill.e If the contingency is based on security prices, the recorded cost of theacquired company should not change. When the contingency isresolved, the fair market value of the additional consideration is appliedto proportionately reduce securities issued and recorded at the date ofacquisition.6Financial Reportinga The retained earnings is that of the surviving entity.b Income is the income of the surviving company up to the date ofcombination plus combined income after combination.7The use of different accounting methods by the combining companies is not an issue because the assets and liabilities of the acquired company are recorded atfair values.8 Disclosures to be made in the financial statements for a purchase:a The business combination was accounted for as a purchase transaction.b The name and a brief description of the acquired company.c The period for which the results of operations of the acquiredcompany are included in the income statement.d The cost of the acquired company, including when applicable, thenumber and value of shares of stock issued or issuable.e A description of any contingent payments.f Several small acquisitions may be combined for disclosure purposes.g For material acquisitions of public companies, the followingsupplemental information on a pro forma basis is required:(1) The results of operations for the current period as though thecompanies had combined at the beginning of the period, and©2009 Pearson Education, Inc. publishing as Prentice Hall 5(2) The results of operations for the immediately preceding periodas though the companies had combined at the beginning of thatperiod if comparative financial statements are presented.h Additional required FASB Statement 141 disclosures include:(1)Primary business reason for the combination(2)Allocation of the purchase price by major balance sheetcategories for assets acquired and liabilities assumedi FASB Statement 142 requires:(1) Material aggregate amounts of goodwill be reported as a separatebalance sheet item(2) Impairment losses must be shown separately on the incomestatement(3)Increased disclosures for intangibles (See text Exhibit 1-3)THE GOODWILL CONTROVERSYA Goodwill is defined as the excess of the investment cost over the fair value of assetsreceived.B Goodwill is no longer amortized for financial reporting purposesC Firms must periodically assess goodwill for impairment in its value. An impairmentoccurs when the recorded value of goodwill is greater than its fair value.1When an impairment occurs, firms must write down goodwill to a new estimated amount and record a loss in calculating net income of a period.2 The treatment of goodwill has not retroactively changed, but firms will ceaseamortizing all previously recorded goodwill.3 Goodwill and all other intangibles that have indefinite useful lives will beperiodically reviewed and adjusted for value impairment.©2009 Pearson Education, Inc. publishing as Prentice Hall 64 Impairment losses on goodwill and other intangible assets will be considered aloss due to a change in accounting principle the first time it is recognized.D The standard also redefines the reporting entity in accounting for intangible assets.Firms will treat goodwill and other intangible assets as assets of the business reporting unit.1These intangible assets will be reported based on their fair value at acquisition date.E Internally developed intangibles that are not specifically identifiable, have indeterminatelives, or are inherent in a continuing business related to the entity will not be recognized as an asset, but expensed (the same treatment will continue for acquired research anddevelopment costs).F Recognizing and measuring impairment losses related to goodwill, a two-step process1 Step one compares book values to fair values at the business reporting unit level. Iffair value is less than book value, an impairment has occurred.2 Step two measures the impairment. The book value of goodwill is compared to itsimplied fair value. The excess book value over implied fair value is the impairmentloss. The loss cannot exceed the book value of the goodwill. Previously recognizedimpairment losses cannot be reversed.3 The impairment test is conducted at least annually, and more frequently if certainconditions warrant.G Amortization versus non-amortization1Amortization is required for intangible assets with a finite useful life.2The method of amortization should reflect the expected pattern of consumption of the economic benefits of the asset.3If a pattern is not determinable, straight-line amortization is acceptable.4Firms will not amortize intangibles with an indefinite life that cannot be estimated. Like goodwill, these assets such be periodically evaluated for possibleimpairments.SARBANES-OXLEY ACT OF 2002©2009 Pearson Education, Inc. publishing as Prentice Hall 7A After the high-profile collapses of WorldCom, Enron, and others, Congress enactedlegislation intended to prevent future financial reporting and auditing abuses, the result was the Sarbanes-Oxley Act of 2002 (SOX).B The new rules focus primarily on corporate governance, auditing, and internalcontrol issues.C The law has far-reaching implications including1Establishment of an independent board, Public Company Accounting Oversight Board, to regulate the accounting and auditing professions.2Requirements restricting certain services provided by auditors to their audit clients.3Requirements for greater independence of corporate board of directors.4Requirements that the CEO and CFO certify the financial statements and the entity’s internal control.5Requirements that auditors review and attest to management’s internal control assessments.6Increased disclosures.D Text Exhibit 1-5 provides an example of management’s certification of financial resultsand internal control.Description of assignment material Minutes Questions (5)Exercises (5)El-1 4 MC general 5El-2 AICPA 2 MC problem-type 10El-3 [Pillow/Sleep-bank] Prepare stockholders’ equity section 15El-4 [Ice Age/Jester] Journal entries (recording business combinations) 20El-5 [Danders/Harrison] Journal entries to record a purchase with direct costs 15 and fair value/book value differencesProblems (5)Pl-1 [Pine/Sain] Prepare balance sheet after purchase business combination 20Pl-2 [Pelican/Seabird] Prepare balance sheet after purchase business combination 20Pl-3 [Persis/Sineco] Journal entries and balance sheet for purchase business 18©2009 Pearson Education, Inc. publishing as Prentice Hall 8combinationPl-4 [Phule/Sen] Allocation schedule and balance sheet 25 Pl-5 [Celistia/Dawn] Journal entries and balance sheet for a purchase combination 35 Internet assignmentUsing annual reports from the websites of three major publicly traded companies, answer questions regarding merger activity. For one company, review Form 10-K and determine what additional information is disclosed that is not available in the annual report. Research caseWal-Mart acquires Target. Recording and a Balance Sheet is required.©2009 Pearson Education, Inc. publishing as Prentice Hall 9Illustration 1-1DIAGRAM OF BASIC TYPES OF BUSINESS COMBINATIONS MERGERCompany A Company B(Surviving Entity) Net assets of BCompany A may acquire the net assets of Company B by issuing debt or equity securities or assets directly to Company B for B's net assets or to B's stockholders for all of B's outstanding stock. In either case, Company B is dissolved and Company A takes over the net assets of Company B.A +B = ACONSOLIDATIONCompany BNet Assets of B (Dissolved Entity) Company A(A new entity)Net Assets of C Company C(Dissolved entity) Company A may acquire the net assets of Company B and Company C by issuing stock directly to Companies B and C for their net assets or to the stockholders of Companies B and C for all of their stock. In either case, Companies B and C are dissolved and Company A takes over their assets.©2009 Pearson Education, Inc. publishing as Prentice Hall 10A +B = CACQUISITION OF NET ASSETS WITHOUT DISSOLUTIONAll or a major portionCompany A of B's operating assets(Acquiring Entity)Same as for a merger or consolidation except that Company A issues debt or equity securities or assets directly to Company B and Company B continues to exist as a separate legal entity.ACQUISITION OF OUTSTANDING STOCK(Parent-Subsidiary operations andconsolidated financial statements)Over 50% of Stock of BCompany A Company B (Parent)Similar to a merger or consolidation except that Company A receives a majority of the outstanding voting stock of Company B by issuing debt or equity securities or assets to the stockholders of Company B. Company B continues to exist as a separate legal entity and to operate in a parent subsidiary relationship with Company A.A +B = A + BIllustration 1-2©2009 Pearson Education, Inc. publishing as Prentice Hall 11Business CombinationsMergers Consolidations Acquisition of Acquisition Controllingof Net Assets InterestPurchase AccountingNeeds Investment Acctg.Cost vs. EquityNeeds ConsolidatedStatements©2009 Pearson Education, Inc. publishing as Prentice Hall 12。
高级会计学(第10版)教师手册 Beams10e_IM06
Chapter 6INTERCOMPANY PROFIT TRANSACTIONS - PLANT ASSETSChapter OutlineSALE OF PLANT ASSETS TO AFFILIATED COMPANIESA The sale of plant assets to affiliated companies at a price other than book valuecreates an unrealized gain or loss to the consolidated entity.B Gain or loss from the intercompany sale appears in the income statement of theselling affiliate in the year of sale.C The gain or loss is unrealized from the viewpoint of the consolidated entity until•The plant asset is sold to an outside entity, or•The asset is fully depreciated through use within the consolidated entity.D The effects of unrealized gains and losses are•Eliminated from investment income in a one-line consolidation (use of equity method)•Eliminated from consolidated financial statements through working paper entries.DOWNSTREAM INTERCOMPANY SALE OF LAND (Illustration 6-1)A In the year of an intercompany sale of land, an entry is made in the consolidationworking papers to eliminate the full amount of the gain on the sale and reduce theland account to its cost to the consolidated entity.1This entry is the same for downstream and upstream intercompany land sales.2The parent company reduces its investment income and investment account for the unrealized intercompany profit.B While the land is held within the consolidated entity in years subsequent to the year ofsale, a consolidation working paper is required each year to reduce the landaccount to its cost basis (credit) and increase the investment account to establishreciprocity with the subsidiary’s equity accounts at the beginning of the period.©2009 Pearson Education, Inc. publishing as Prentice Hall 48C When the land is sold to an outside entity, the parent company recognizes the previously deferred gain from the intercompany sale.1 A consolidation working paper entry converts the gain on sale of land to the gainto the consolidated entity and establishes reciprocity between beginninginvestment and subsidiary equity accounts.2The consolidated gain is the difference between the cost of the land and the final selling price to an outside entity.UPSTREAM INTERCOMPANY SALE OF LAND (Illustration 6-1)A In the year of the intercompany sale of land, the full amount of the gain on the sale iseliminated from the consolidated financial statements and the land is reported atits cost to the consolidated entity.B The parent company reduces its investment income for only its proportionate shareof the unrealized gain because the noncontrolling interest is also charged with its share of the unrealized gain.C In the consolidation working papers, noncontrolling interest expense is computed as thesubsidiary’s realized income times the noncontrolling interest percentage.1Realized income is the subsidiary’s reported income less unrealized gains and plus unrealized losses.D While the land is held within the consolidated entity in years subsequent to the year ofsale, a consolidation working paper is required each year to:1 Reduce the land account to its cost basis,2Increase the investment account for its share of the unrealized gain (this entry establishes reciprocity with the subsidiary’s equity accounts at thebeginning of the period), and3Decrease the beginning noncontrolling interest to its balance at the end of the previous year (in other words, compute noncontrolling interest on thebasis of realized income rather than on the basis of reported income)E When the parent company sells the land to an outside entity, the gain or loss to theparent is converted to a gain or loss to the consolidated entity for reporting in theconsolidated financial statements.©2009 Pearson Education, Inc. publishing as Prentice Hall 491 The amount of the gain or loss is the difference between the cost of the landand final selling price to the outside entity.2 A working paper entry enters the gain from the intercompany sale,increases the investment account to establish reciprocity with beginningsubsidiary equity accounts, and decreases the beginning noncontrollinginterest to its balance at the end of the previous year.3Only the credit to the gain on land is different from the entries in the previous year in which the land was held within the consolidated entity.4On the parent company’s books, the parent’s share of the previously deferred gain from the intercompany sale is recognized and realized with an entrythat increases investment income and the investment account. DOWNSTREAM SALES OF DEPRECIABLE PLANT ASSETS (Illustration 6-2)A In the year of sale, the unrealized gain from a downstream sale of plant assets isreflected in the parent company’s accounts.1The unrealized gain is eliminated in determining investment income under the equity method.2The unrealized gain does not appear in the consolidated income statement.•The unrealized gain is removed from consolidated financial statements by a working paper entry that eliminates the gain and returns the plant assetto its depreciated cost to the consolidated entity at the time of sale.3Next, depreciation expense and accumulated depreciation are reduced in the consolidation working papers.•Adjusts these items to the depreciated cost basis to the consolidated entity at the end of the year.•Adjusts depreciation expense to the amount it would have been had the intercompany sale not taken place.•By reducing depreciation expense, the gain is recognized on a piecemeal basis as the asset is used by the consolidated entity.4 The noncontrolling interest computation is not affected.B In years subsequent to the year of intercompany sale, as the overstated plant asset isdepreciated, the parent company adjusts it investment income for the piecemealrecognition of the previously unrecognized gain.©2009 Pearson Education, Inc. publishing as Prentice Hall 501The full amount of the gain from the intercompany sale will be recognized through investment income at the end of the useful life of the plant asset.2Als o at the end of the plant asset’s useful life, the investment account will reflect the parent’s proportionate share of the subsidiary’s underlyingequity, assuming there are no other unrealized profits or cost-book valuedifferentials.UPSTREAM SALES OF DEPRECIABLE PLANT ASSETS (Illustration 6-@)A In the year of an upstream sale at other than book value, the gain or loss is reflected inthe subsidiary accounts.1Investment income for the year of sale is adjusted for the parent’s share of the unreal ized gain or loss and the parent’s share of any piecemealrecognition of the gain or loss through depreciation.2Noncontrolling interest expense is computed as the noncontrolling interest ownership percentage times the subsidiary’s realized income.•Rea lized income is the subsidiary’s reported net income less the realized gain plus piecemeal recognition of the gain through depreciation.3The unrealized gain does not appear in the consolidated statements.4Consolidation working paper entries are required to eliminate the effects of the intercompany upstream sale•The unrealized gain is eliminated and the plant asset is returned to its depreciated cost to the consolidated entity at the time of sale.•Excess depreciation for the current year (depreciation in excess of theamount that would have been recorded had the intercompany sale not takenplace) is eliminated from the depreciation accounts. This is the piecemealrecognition of the gain.B In years subsequent to the year of the upstream intercompany sale, working paperentries•Allocate the unrealized gain between the investment account and beginning noncontrolling interest, and•Return the plant asset and accumulated depreciation accounts to a cost basis to the consolidated entity.©2009 Pearson Education, Inc. publishing as Prentice Hall 511The debit to noncontrolling interest adjusts the beginning noncontrolling interest balance of the current year to the ending balance of the previousyear.2The debit to the investment account establishes reciprocity between the investment account balance and the s ubsidiary’s equity accounts at thebeginning of the period.3When the full amount of the unrealized gain has been realized through depreciation, no further adjustments are necessary.PLANT ASSETS SOLD AT OTHER THAN FAIR VALUEA An intercompany sale of plant assets at a loss requires special evaluation to ensure theloss should not have been recognized by the selling affiliate prior to theintercompany sale.B Sale of assets above fair value also creates problems for the parties involved.C While the process for consolidation does not change, questions regarding inappropriaterecognition of gains or losses could lead to charges of improper stewardship on thepart of corporate directors.INVENTORY ITEMS SOLD INTERCOMPANY FOR USE AS PLANT ASSETSA The unrealized gain on the sale is recognized through depreciation by thepurchasing affiliate.B Working paper entries in the year of intercompany sale:1Reduce sales for the intercompany sale, reduce cost of sales for the cost of the inventory item, and reduce the plant asset to its cost basis to theconsolidated entity.2Eliminate depreciation expense (piecemeal recognition of the gross profit on sale occurs as the depreciation expense is eliminated).C Working paper entries in subsequent years will•Reduce the plant asset to its cost basis,•Eliminate depreciation expense (piecemeal recognition of the gross profit on sale occurs as the depreciation expense is eliminated), and•Establish reciprocity between beginning-of-the-period equity andinvestment amounts.©2009 Pearson Education, Inc. publishing as Prentice Hall 52ELECTRONIC SUPPLEMENTThe electronic supplement discusses situations where the parent company uses either the incomplete equity method or the cost method to account for it investment.©2009 Pearson Education, Inc. publishing as Prentice Hall 53Description of assignment material Minutes Questions (10)Exercises (11)E6-1 4 MC general questions 12 E6-2 [Parsen/Samit] Discussion (effect of intercompany sale of land) 15 E6-3 [Pruitt/Silverman] Computations for downstream and upstream sale of 20 land (90% owned subsidiary, year of sale and subsequent year)E6-4 [Pigwich/Salmark] Journal entries and consolidated income statement 15 (downstream sale of building, noncontrolling interest)E6-5 AICPA 4 MC general questions 12 E6-6 6 MC problem type questions 30 E6-7 [Pod/Seiver] Prepare a consolidated income statement (75% owned 25 subsidiary, sale of machinery that was sold upstream 2 years earlier)E6-8 [Pepper/Salt] Investment income from 40% investee (upstream inventory 15 sales and downstream sale of land, two years)E6-9 [Plain/Simple] Computations (upstream sale of equipment, noncontrolling 20 interest)E6-10 [Ped/Spano] Computations (inventory items of parent capitalized by subsidiary) 20 E6-11 [Pasco/Slocum] Calculate consolidated net income over 4 years (negative 35 goodwill, upstream sale of land, downstream sale of machinery, upstreaminventory sales)Problems (11)P6-1 [Pearl/Sear] Prepare a consolidated income statement (100% owned 25 subsidiary, incomplete equity method, downstream sales of plant assetsand inventories)P6-2 [Pal/Sim] Consolidated working papers (downstream sale of inventory, land, 50 and equipment, intercompany receivables/payables)P6-3 [Pall/Stor] Consolidated working papers (downstream inventory, land, and 50 Equipment sales, intercompany receivables/payables)P6-4 [Parch/Sarg] Financial statement working papers in year of acquisition (equity 50 method with noncontrolling interest, downstream sales of land and equipment)P6-5 [Pall/Stor] Financial statement working papers (downstream sale of inventory 50 and land, downstream sale of machinery the previous year)P6-6 [Pill/Sank] Financial statement working papers 2 years after acquisition (equity 50 method with noncontrolling interest, cost/book value differential, downstream sale ofequipment in previous year)P6-7 [Port/Skip] Financial statement working papers 4 years after acquisition of 70 100%-owned subsidiary (equity method, downstream sale of inventory items,upstream sale of equipment in current year)P6-8 [Pic/Sic] Consolidation working papers for year of acquisition and subsequent 90 ©2009 Pearson Education, Inc. publishing as Prentice Hall 54year (incomplete equity method, upstream sale of machinery in first year, trialbalances given)P6-9 [Park/Spin] Financial statement working papers 3 years after acquisition of 80% 60 interest(equity method, upstream sales of inventory items, upstream sales of plantassets in previous year)P6-10 [Pill/Sank] Consolidated working papers (upstream land, equipment sales) 45 P6-11 [Pape/Sach] 10 questions that analyze separate company and consolidated 30 statements that are provided.Internet assignmentUsing the AT&T annual report from its website, review and discuss information relating to intercompany asset transactions.Illustration 6-1©2009 Pearson Education, Inc. publishing as Prentice Hall 55INTERCOMPANY PROFITS ON LANDP owns a 90% interest in S, acquired at fair value at the beginning of 20Xl. During 20X1 land that cost $1,500 is sold intercompany for $2,500. The land is sold to an outside entity in 20X3 for $3,000.Separate Incomes 20Xl:P Sells Land to S S Sells Land to PDownstream UpstreamP S P SSales $50,000 $30,000 $50,000 $30,000 Expenses and costof sales (40,000) (25,000) (40,000) (25,000)Gain on saleof land 1,000 1,000Separate incomes $11,000 $ 5,000 $10,000 $ 6,000 Separate Incomes 20X2:Sales $55,000 $35,000 $55,000 $35,000 Expenses and costof sales (44,000) (29,000) (44,000) (29,000)Separate incomes $11,000 $ 6,000 $11,000 $ 6,000 Separate Incomes 20X3:Sales $60,000 $38,000 $60,000 $38,000 Expenses and costof sales (50,000) (30,000) (50,000) (30,000)Gain on saleof land 500 500Separate incomes $10,000 $ 8,500 $10,500 $ 8,000©2009 Pearson Education, Inc. publishing as Prentice Hall 561DOWNSTREAM SALE - 20XI:$1,000 unrealized gain deferredOne-line consolidation entry:Investment in S $3,500Income from S $3, 500To record 90% of S's reported income and eliminateunrealized profit on land. [Computation: ($5,000 x 90%) - $1,000] Consolidation working paper entries:a Gain on sale of land $1,000Land $1,000To eliminate unrealized profit on sale of land to S andreduce land to its cost basis.b Income from S $3,500Investment in S $3,500To eliminate investment income and return investmentaccount to its beginning of the period balance.©2009 Pearson Education, Inc. publishing as Prentice Hall 572DOWNSTREAM SALES - l9X2One-line consolidation entry:Investment in S $5,400Income from S $5,400 To record 90% of S's reported income. Computation:$6,000 x 90%Consolidation working paper entries:a Investment in S $1,000Land $1,000 To reduce land to its cost basis and adjust investmentaccount to establish reciprocity with S's beginning ofthe period equity accounts.b Income from S $5,400Investment in S $5,400 To eliminate investment income and return investmentaccount to its beginning of the period balance.©2009 Pearson Education, Inc. publishing as Prentice Hall 583 DOWNSTREAM SALES - 20X3: Land is sold to outside entityOne-line consolidation entrv:Investment in S $8,650Income from S $8,650 To record 90% of S's reported income and recognizethe previously deferred profit on the sale of land to S.Computation: $8,500 x 90% + $1,000Consolidation working paper entries:a Investment in S $1,000Gain on sale of land $1,000 To adjust gain on sale of land to the $1,500 gain tothe consolidated entity.b Income from S $8,650Investment in S $8,650 To eliminate investment income and return investmentaccount to its beginning of the period balance.©2009 Pearson Education, Inc. publishing as Prentice Hall 594 UPSTREAM SALES - 20XI:$1,000 unrealized gain deferredOne-line consolidation entry:Investment in S $4,500Income from S $4,500 To record 90% of S's realized income. Computation:($6,000 - $1,000 unrealized profit) x 90%Consolidation working paper entries:a Gain on sale of land $1,000Land $1,000 To eliminate unrealized profit on sale of land to P andreduce land to its cost basis.b Income from S $4,500Investment in S $4,500 To eliminate investment income and return investmentaccount to its beginning of the period balance.©2009 Pearson Education, Inc. publishing as Prentice Hall 605UPSTREAM SALES - 20X2One-line consolidation entry:Investment in S $5,400Income from S $5,400 To record 90% of S's reported income. Computation:$6,000 x 90%Consolidation working paper entries:a Investment in S $ 900Noncontrolling interest-beginning 100Land $1,000 To reduce land to its cost basis and adjust investmentand beginning noncontrolling interest amounts to establishreciprocity with the beginning of the period equityaccounts of S.b Income from S $5,400Investment in S $5,400 To eliminate investment income and return investmentaccount to its beginning of the period balance.©2009 Pearson Education, Inc. publishing as Prentice Hall 616UPSTREAM SALE - 20X3: Sale to outside entity.One-line consolidation entry:Investment in S $8,100Income from S $8,100 To record 90% of S's reported income and recognize thepreviously deferred profit on the sale of land to S.Computation: $8,000 x 90% + $900Consolidation working paper entries:a Investment in S $ 900Noncontrolling interest 100Gain on sale of land $1,000 To adjust gain on sale of land to the $1,500 gain tothe consolidated entity.b Income from S $8,100Investment in S $8,100 To eliminate investment income and return investmentaccount to its beginning of the period balance.©2009 Pearson Education, Inc. publishing as Prentice Hall 62Illustration 6-2INTERCOMPANY SALE OF MACHINERYP owns a 90% interest in S, acquired at book value equal to fair value at the beginning of 20XI. Part A On January 1, 20Xl P sells machinery with a book value of $4,000 and a 10-year remaining useful life to S for $5,000.20X1 20X2Separate Incomes Separate IncomesP S P SSales $50,000 $30,000 $55,000 $35,000 Gain on saleof machinery 1,000Depreciation expense (10,000) ( 5,500) (10,000) ( 5,500) Other expenses (30,000) (20,000) (34,000) (24,000) Separate incomes $11,000 $ 4,500 $11,000 $ 5,500 Part B On January 1, 20X1 S sells machinery with a book value of $4,000 and a 10-year remaining useful life to P for $5,000.20X1 20X2Separate Incomes Separate IncomesP S P S Sales $50,000 $30,000 $55,000 $35,000 Gain on saleof machinery 1,000Depreciation expense (10,500) (5,000) (10,500) ( 5,000) Other expenses (30,000) (20,000) (34,000) (24,000) Separate incomes $ 9,500 $ 6,000 $10,500 $ 6,000 ©2009 Pearson Education, Inc. publishing as Prentice Hall 63Part A: DOWNSTREAM SALE OF MACHINERY - 20XI($1,000 gain - $100 unrealized gain deferred)One-line consolidation entry:Investment in S $3,150Income from S $3,150 To record 90% share of S's net income less gain onsale of machinery plus piecemeal recognition ofgain through depreciation. Computation:($4,500 x 90%) - $1,000 + $100Consolidation working paper entries:a Gain on machinery $1,000Machinery $1,000 To eliminate unrealized gain and reduce machinery to acost basis.b Accumulated depreciation-machinery $ 100Depreciation expense $ 100 To eliminate the current year's effect of theunrealized gain from depreciation accounts.c Income from S $3,150Investment in S $3,150 To eliminate investment income and adjust investmentaccount to its beginning of the period balance.©2009 Pearson Education, Inc. publishing as Prentice Hall 64Part A: DOWNSTREAN SALE OF MACHINERY - 20X2($100 of $900 deferred gain is recognized in 20X2)One-line consolidation entry:Investment in S $5,050Income from S $5,050 Computation: ($5,500 x 90%) + $100Consolidation working paper entries:a Accumulated depreciation-machinery $ 100Depreciation expense $ 100 To eliminate current year's effect of unrealized profitfrom depreciation accounts.b Investment in S $ 900Accumulated depreciation 100Machinery $1,000 To eliminate unrealized profit from machinery andaccumulated depreciation as of the beginning of theyear and to adjust the investment account for the difference.c Income from S $5,050Investment in S $5,050 To eliminate investment income and adjust theinvestment account to the beginning of the periodbalance.©2009 Pearson Education, Inc. publishing as Prentice Hall 65Part B: UPSTREAM SALE OF MACHINERY - 20XI($1,000 - $100 unrealized gain deferred)One-line consolidation entry:Investment in S $4,590Income from S $4,590 Computation: ($6,000 - $1,000 + $100) x 90%Consolidation working paper entries:a Gain on sale of machinery $1,000Machinery $1,000 To eliminate unrealized gain and reduce machinery to acost basis.b Accumulated depreciation-machinery $ 100Depreciation expense $ 100 To eliminate the current year's effect of unrealizedgain from depreciation accounts.c Income from S $4,590Investment in S $4,590 To eliminate investment income and adjust investmentaccount to its beginning of the period balance.©2009 Pearson Education, Inc. publishing as Prentice Hall 66Part B: UPSTREAN SALE OF MACHINERY - 20X2($100 of $900 deferred gain is recognized in 20X2)One-line consolidation entry:Investment in S $5,490Income from S $5,490To record 90% of S's realized income. Computation:($6,000 + $100) x 90%Consolidation working paper entries:a Accumulated depreciation-machinery $ 100Depreciation expense $ 100 To eliminate 20Xl unrealized gain from currentdepreciation accounts.b Investment in S $ 810Noncontrolling interest-beginning 90Accumulated depreciation 100Machinery $1,000 To eliminate unrealized profit from machinery andaccumulated depreciation and to establish reciprocitybetween the majority and noncontrolling interests andsubsidiary equity accounts as of the beginning of the period.c Income from S $5,490Investment in S $5,490 To eliminate investment income and adjust the investmentaccount to the beginning of the period balance.©2009 Pearson Education, Inc. publishing as Prentice Hall 67。
高级会计学(第10版)教师手册 Beams10e_IM08
Chapter 8CONSOLIDATIONS - CHANGES IN OWNERSHIP INTERESTSChapter OutlineACQUISITION OF A SUBSIDIARY DURING AN ACCOUNTING PERIODA When a subsidiary is acquired during an accounting period, the subsidiary’s salesand expenses are included in the consolidated income statement for the full year.B The income of a subsidiary earned prior to acquisition is included in theacquisition’s purchase price negotiated by the parent.1This purchased income (or preacquisition income) must be eliminated from consolidated income2In theory the elimination could be made by either eliminating the preacquisition sales and cost of goods sold or by eliminating the preacquisition income.3ARB No. 51 recommended the latter method. That is, including the detailed sales and cost of goods sold information, but deducting preacquisitionincome to arrive at consolidated net income.4FASB # 160 states that consolidated net income should only reflect subsidiary earnings subsequent to acquisition date. Preacquisition earnings should notappear. Essentially the books of the subsidiary are closed at acquisition date.C Dividends paid on the purchased company’s stock before the stock is acquired by theparent company during an accounting period are referred to preacquisition dividends.1 Preacquisition dividends are eliminated because they are not part of the equityacquired.D Changes in consolidation working paper procedures for acquisitions during anaccounting period are as follows:1In the working paper entry that eliminates the reciprocal Investment inSubsidiary and subsidiary equity accounts:a Preacquisition income is eliminated in the consolidation workingpapers as a debit, and©2009 Pearson Education, Inc. publishing as Prentice Hall 79b Preacquisition dividends are eliminated.2The reason for including the above items in the working paper entry is that subsidiary equity balances are eliminated as of the beginning of the periodand the investment balance is eliminated as of the date of acquisition withinthe period (and thus reflects the purchased income and preacquisitiondividends).3Preacquisition income, like noncontrolling interest income, is deducted from total consolidated income as a separate item in the consolidated incomestatement.E When the parent company’s interest increases during the y ear, noncontrollinginterest is computed on the basis of the noncontrolling shares outstanding at year- end.CONTROLLING INTEREST ACQUIRED THROUGH A SERIES OF STOCK PURCHASESA When a corporation acquires a controlling interest through a series of stock purchasesover a period of time, a cost/book value differential is determined for eachinvestment.B If the piecemeal acquisitions are made within an accounting period, preacquisitionincome and dividends are determined for each investment.C Income, dividends, and amortization of cost-book value differentials aredetermined for each investment.D The noncontrolling interest income is based on the noncontrolling interestownership at year end as long as the parent company’s ownership interest did notdecrease.WHEN A PARENT COMPANY SELLS AN OWNERSHIP INTEREST, THE GAIN OR LOSS ON THE SALE IS THE DIFFERENCE BETWEEN THE PROCEEDS FROM THE SALE AND THE BOOK VALUE OF THE INVESTMENT INTEREST SOLD.A When a parent company sells an ownership interest, t he gain or loss on the sale is thedifference between:•The sales proceeds, and•The book value of the investment sold©2009 Pearson Education, Inc. publishing as Prentice Hall 80B Under FASB #160, when a consolidated group of firms is involved , we only record gain/loss when the interest sold lead to deconsolidation of a former subsidiary otherwise it is treated as an equity transaction.C If the investment was acquired through piecemeal acquisitions, the shares sold must beidentified with particular acquisitions.D At the beginning of the period, the sale of an interest at a price in excess of book valuereduces the investment account and creates a gain on the sale that is both a gain for the parent company and the consolidated entity.1In the consolidation working papers, the gain is carried to the consolidated income statement column.2Noncontrolling interest is computed on the basis of the ending noncontrolling interest percentage when an investment interest is sold at the beginning of theperiod.E The sale of an interest during an accounting period may be recorded as of theactual sale date or, as an expedient, as of the beginning of the period.•Use of the beginning of the period assumption is more efficient andpractical because current retained earnings information is usually notavailable during the period.1Beginning of the period sale assumption:a The gain on the sale is the difference between the proceeds and the bookvalue of the interest sold at the beginning of the period.b Noncontrolling interest is computed as if the ending noncontrollinginterest had been outstanding throughout the year.c Any dividends received on the interest sold prior to the sale must beincluded in the calculation of the gain or loss on sale.d Parent company and consolidated net income are not affected by thebeginning of the period assumption.e Any difference in the gain or loss on sale is exactly offset by differencesin computing the income from subsidiary, amortization of cost-bookvalue differentials, and minority interest amounts.2Actual sale date:©2009 Pearson Education, Inc. publishing as Prentice Hall 81a The parent company makes an entry to bring the investment accountto its book value on the date of sale (i.e., the parent records incomefrom subsidiary, including amortization of cost book value differentials,from the beginning of the period to the sale date).b The proceeds from the sale of the investment are recorded, theinvestment account is credited for the book value of the interest sold, anda gain or loss is recognized for the difference.c At the end of the period, the parent company records investmentincome on the investment interest retained from the date of sale tothe end of the period.d Investment income for the year is the total of the investment income onthe interest held at the beginning of the period to the date of saleplus investment income on the percentage interest retained from thesale date to the end of the period.e Noncontrolling interest income is calculated as the noncontrollinginterest’s beginning of the period percentage times the subsidiary’sincome to the date of sale plus the noncontrolling interest’s endingpercentage times the subsidiary’s income from the date of sale to the endof the period.f Comparison of the actual sale date and the beginning of the year saledate assumption:(1)The year-end investment account balance and endingnoncnontrolling interest are the same under the twoassumptions.(2)Cash flow from the proceeds of the sale and dividendsreceived are the same under the two assumptions.(3)The difference in the gain on the sale of an interest under thetwo assumptions is offset by differences in (a) noncontrollinginterest income, (b) the parent company’s share of subsidiaryincome, and (c) amortization of cost book value differentials. SALE OR REPURCHASE OF SUBSIDIARY CAPITAL STOCKA Subsidiary operations may be expanded through the issuance of additional shares ofstock, or operations may be contracted through repurchase of the shares.•The parent company, through its controlling interest, makes the decisions for the subsidiary.©2009 Pearson Education, Inc. publishing as Prentice Hall 82B The noncontrolling interest shareholders may exercise their preemptive right tosubscribe to additional stock issuances in proportion to their holdings.C The parent company’s investment in subsidiary may be impacted by subsidiary salesand purchases of its own shares.•This depends on the purchase or sales price of the shares.D The parent company’s percentage ownership in the subsidiary is determined by dividingthe number of shares held by the parent by the total number of subsidiary shares outstanding after the sale or purchase.E Sales of stock by a subsidiary to its parent company result in cost/book valuedifferentials equal to the parent company’s share of the difference in thesubsidiary’s stockholders’ equ ity immediately before and immediately after thesale of stock.1The book value of the investment interest acquired from the subsidiary is computed asa The underlying book value of the parent company’s interest after thepurchase of the additional shares less the underlying book value of theparent company’s interest before the purchase.2If the parent company acquires the additional shares at book value, the parent’s investment account increases by the amount of the purchase, but there isno cost-book value differential on the new investment.3If the parent company acquires the additional shares at a price above book value, the parent’s investment account increases by the amount of the purchaseand a cost-book value differential is computed on the new investment.a The excess cost over book value acquired is assigned to identifiableassets or goodwill and amortized over the life of the assets.b The amortization of the cost-book value differentials remaining fromthe original investment does not change.5If the parent company acquires the additional shares at a price less than book value, the parent’s investment account increases by the amount of the purchaseprice.a As an expedient, the excess book value over cost is charged to anygoodwill from the parent’s earlier investments in the subsidiary.©2009 Pearson Education, Inc. publishing as Prentice Hall 83F Sales of stock by a subsidiary to outside entities are considered capital transactions.1The effect on the parent company’s investment in subsidiary account depends on the selling price of the subsidiary’s shares.2The increase or decrease in the parent company’s underlying book value in the subsidiary is computed as the parent company’s equity in the subsidiaryafter the stock issuance less the parent company’s equity in the subsidi arybefore the stock issuance.a If the subsidiary shares are sold at book value, the parent company’sequity in the subsidiary is not affected.b If the subsidiary shares are sold above book value, the parent company’sequity in the subsidiary increases.c If the subsidiary shares are sold below book value, the parent company’sequity in the subsidiary decreases.3There are two methods of accounting for the decreased ownership interest on the parent company books:a The parent’s additional pai d-in capital account and investmentaccount are adjusted for the change in underlying equity(1)Unamortized cost-book value differentials are not adjustedfor the decreased ownership interest.(2)This method is supported by APB Opinion No. 9 which excludesadjustments from transactions in a company’s own stockfrom net income.b Alternatively, the decrease in ownership is treated as a sale and thedifference between book value of the investment interest sold and theparent’s share of the proceeds from the subsidiary’s stock issuance isrecognized as a gain or loss.(1)The parent company is assumed to have sold an interest equalto its percentage ownership before the stock issuance less thepercentage ownership after the stock issuance.(2)Unamortized cost-book value differentials on the interestassumed sold is the only difference between the gain (under thismethod) and the adjustment to additional paid-in capital (underthe first method).(3)This method is supported by an AICPA Issues Paper and is alsopermitted by the SEC.©2009 Pearson Education, Inc. publishing as Prentice Hall 84G If the parent company and noncontrolling interests (outside investors) purchase theshares relative to their existing stock ownership, there will be no adjustment toadditional paid-in capital, regardless of the price paid for the stock. Similarly, theparent company will have no excess cost over book value acquired.H Under FASB # 160, a sale of an interest resulting in deconsolidation the gain/los ismeasured as the difference between the aggregate of fair value of consideration received, fair value of any retained noncontrolling investment, and the carrying amount of thenoncontrollinng interest in the former subsidiary and the carrying amount of the former subsidiary’s assets and liabilities.I Treasury stock transactions by a subsidiary:1Insignificant treasury stock transactions do not require adjustmentsbecause they tend to be offsetting.2Acquisition of treasury shares by a subsidiary decreases subsidiary stockholders’ equity and subsidiary shares outstanding.a If the subsidiary buys the shares from the noncontrollingshareholders at book value, the parent company’s percentageownership increases, but its share of the subsidiary equity is unchanged.No adjustment is required.b If the subsidiary buys the shares from noncontrolling shareholders at aprice above book value, the parent company’s percentage ownershipincreases, but its share of the subsidiary’s book value decreases.(1)The parent company records the decrease by a debit toadditional paid-in capital and a credit to the investmentaccount.(2)The amount of the decrease is the parent’s share of thesubsidiary’s book value before the treasury stock transaction lessthe parent’s share of the subsidiary’s book value after the treasurystock transaction.c If the subsidiary buys the shares from noncontrolling shareholders at aprice below book value, the parent company’s percentage ownershipincreases and its share of the subsidiary’s book value incre ases.(1)The investment account is increased and additional paid-incapital is increased.©2009 Pearson Education, Inc. publishing as Prentice Hall 85(2)The increase is the parent’s share of subsidiary’s book valueimmediately after the treasury stock transaction less the bookvalue immediately before the treasury stock transaction. STOCK DIVIDENDS AND STOCK SPLITSA Subsidiary stock splits increase the number of outstanding shares, but do not affectsubsidiary net assets or the parent company and noncontrolling interest ownership percentages.B Stock dividends lead to some changes in the subsidiary’s equity accounts.1An amount of retained earnings equal to the par or stated value or the market price of the additional shares issued is transferred to paid-in capital. Thus, thesubsidiary equity accounts in the consolidation working papers are affected.2Stock dividends do not affect parent company accounting.ELECTRONIC SUPPLEMENTInterim poolings are discussed.Description of Assignment Material Minutes Questions (11)Exercises (13)E8-1 [Pie/Sweet] Allocate subsidiary's income and dividends to controlling, 10 noncontrolling, and preacquisition interestsE8-2 [Pinnacle/Superstore] Piecemeal acquisition of controlling interest with 15 preacquisition income and dividendsE8-3 [Peat/Swamp] Journal entries (sale of an interest - beginning of year 15 assumption)E8-4 [Pauley/Savage] Computations (sale of equity interest - beginning of year 20 or actual sale date assumption)E8-5 [Phrog/Stork] Computations and consolidation working paper entries 25 (midyear purchase of a subsidiary)E8-6 [Petal/Sower] Computations (additional stock issued by subsidiary directly 15 to parent)E8-7 [Pod/Sod] Computations (additional stock issued by subsidiary under 20 different assumptions)E8-8 [Primetime/Satellite] Computations (subsidiary issues additional stock 20 under different assumptions)E8-9 [Plum/Sum] Computations (midyear piecemeal acquisitions with goodwill) 30 E8-10 [Piccolo/Sandridge Mines] Computations for two years (sale of an interest] 25 E8-11 [Panda/Sanyo] Computations (changes in subsidiary’s outstanding shares)20 ©2009 Pearson Education, Inc. publishing as Prentice Hall 86E8-12 [Puckett/Saton] Journal entries (subsidiary issues additional shares directly 20 to parent)E8-13 [Patrick/Striper] Computations and journal entries (subsidiary issues 15 additional shares to outside entities)Problems (12)P8-1 [Paper/Spindle] Computations (midyear acquisition and purchase of additional 20 shares)P8-2 [Prince/Smithtown] Computations and journal entries (subsidiary issues 16 additional shares to public)P8-3 [Patterson/Shawnee] Journal entries (sale of an interest) 15 P8-4 [Panama/Shenandoah] Computations (reduction of interest owned under 35 three options)P8-5 [Pallo/Sala] Computations (subsidiary issues additional shares) 25 P8-6 [Post/Stake] Computations (midyear purchase of additional interest, 30 preacquisition income)P8-7 [Percy/Sawyer] Consolidated income statement (midyear purchase of 30 additional interest)P8-8 [Pop/Sat] Financial statement working papers (equity method, midyear 40 acquisition of 80% interest with downstream inventory sales)P8-9 [Pal/Sid] Financial statement working papers in year of acquisition (equity 40 method with noncontrolling interest, preacquisition income, downstream sale ofequipment, upstream sale of land, subs idiary holds parent’s bonds)P8-10 [Poco/Sam] Financial statement working papers (equity method, midyear 50 purchase of 10% interest at book value, downstream sales of inventory, land,and machinery)P8-11 [Pak/Sly] Financial statement working papers for midyear acquisition of 85% 50 interest (equity method with preacquisition income and dividends, upstream saleof inventory, downstream sale of inventory item used by subsidiary as plant asset)P8-12 [Poff/Sato] Consolidated statement of cash flows - indirect method (sale of an 50 interest)Internet AssignmentReview the Google, Incorporated 2006 annual report from their website and prepare a summary of Google’s ac quisition activities. Determine the number of interim acquisitions, the number of acquisitions using the purchase method, and whether acquisitions were completed by exchanging shares or through cash payments.©2009 Pearson Education, Inc. publishing as Prentice Hall 87Illustration 8-1PREACQUISITION INCOME FROM MIDYEAR PURCHASEAssumptions1P's separate income is $100,0002 S's separate income is $60,000 and its dividends were paid $15,000 on April 15 and$15,000 on October 153 S's stockholders' equity on January 1 consists of $500,000 capital stock and $100,000retained earnings4P acquires a 90% interest in S on May 1 at its $544,500 book value (90% x ($600,000 + $20,000 income January 1 through May 1 - $15,000 dividends on April 15)]Allocation of IncomeTo P -- $60,000 x 8/12 year x 90% $ 36,000 To noncontrolling interest -- $60,000 x 1 year x 10% 6,000 To preacquisition income -- $60,000 x 4/12 year x 90% 18,000One-line ConsolidationP's separate income $100,000 Add: Income from S 36,000 P's net income $136,000 Consolidated Net IncomeCombined incomes of P and S $160,000 Less: Preacquisition income $18,000Noncontrolling interest income* 6,000 (24,000) Net income $136,000 Working Paper EntryCapital stock - S $500,000Retained earnings - S 100,000Preacquisition income 18,000Dividends - S**$ 13,500Investment in S 544,500Noncontrolling interest - beginning 60,000*Noncontrolling interest income is $60,000 x 10%, computed for noncontrollinginterest on December 31**Preacquisition dividends ($15,000 April 15 dividend x 90%)©2009 Pearson Education, Inc. publishing as Prentice Hall 88Illustration 8-2MIDYEAR SALE OF AN INTEREST IN A SUBSIDIARY COMPANY(BEGINNING OF THE YEAR SALE ASSUMPTION) Assumptions1S is a 90% owned subsidiary of P on January 1, 20Xl2P's investment in S account on January 1, 20Xl is $90,000, equal to 90% of the underlying equity of S on that date3 P sells a 10% interest in S on April 1, 20Xl for $15,0004P's separate income for 20Xl is $100,000 plus the gain on sale5S's net income for 20Xl is $40,000Gain on Sale IsComputed as ofJanuary 1. 20X1P's Net Income for 20XlP's separate income excluding gain $100,000 Add: Gain on sale of 10% interests a[$15,000 - ($90,000 investment balance on January 1 x 10%/90%) 5,000 Add: Equity in S's income ($40,000 x 80% x 1 year) 32,000 P's net income $137,000 a Since the investment equals underlying equity, the investment interest sold on January 1 equals $100,000 x 10% or $10,000.Consolidated Net Income for 20XlCombined separate incomes of P and S $145,000 Less: Noncontrolling interest income $40,000 x 20% x 1 year 8,000 Net income $137,000 ©2009 Pearson Education, Inc. publishing as Prentice Hall 89Illustration 8-3MIDYEAR SALE OF AN INTEREST IN A SUBSIDIARY COMPANY(ACTUAL SALE DATE ASSUMPTION)Assumptions1S is a 90% owned subsidiary of P on January 1, 20Xl2P's investment in S account on January 1, 20Xl is $90,000, equal to 90% of the underlying equity of S on that date3P sells a 10% interest in S on April 1, 20Xl for $15,0004P's separate income for 20Xl is $100,000 plus the gain on sale5S's net income for 20Xl is $40,000Gain on Sale IsComputed as ofApril 1, 20XlP's Net Income for 20XlP's separate income excluding gain $100,000 Add: Gain on sale of 10% interest a$15,000 - ($99,000 book value on April 1 x 10%/90%) 4,000 P's separate income 104,000 Add: Equity in income of S($40,000 x 80% x 1 year) + ($40,000 x 10% x 1/4 year) 33,000 P's net income $137,000 a Since the investment equals underlying equity, the investment interest sold on April 1 equals $110,000 book value x 10% or $11,000.Consolidated Net Income for 20XlCombined separate incomes of P and S $144,000 Less: Noncontrolling interest income($40,000 x 10% x 1/4 year) + ($40,000 x 20% x 3/4 year) 7,000 Net income $137,000 ©2009 Pearson Education, Inc. publishing as Prentice Hall 90。
高级会计学(第10版)教师手册 Beams10e_IM07
Chapter 7INTERCOMPANY PROFIT TRANSACTIONS - BONDSChapter OutlinePURCHASES OF BONDS BY AFFILIATESA When one affiliate purchases the bonds of another affiliated company on the openmarket, the bonds are no longer outstanding from the viewpoint of the consolidated entity.B However, the purchasing affiliate accounts for the bond investment as if the bonds werethose of an unaffiliated entity and the issuing affiliate continues to account for thebonds as if they were debt obligations held by unaffiliated entities.C Consolidated statements are prepared to show the financial position and results ofoperations as if the issuing affiliate had purchased and retired its own bonds.1The bonds are constructively retired in the consolidation process. Payables and receivables related to the intercompany bond holdings are reciprocals thatmust be eliminated.2The difference between the book value of the bond liability and thepurchase price of the investment is a constructive gain or loss of theconsolidated entity.a The gain or loss is realized and recognized by the consolidated entity.b The gain or loss is not recognized on the books of the issuing affiliate.c Constructive gains and losses are assigned to the issuing affiliate. T'hisis supported by the concept of agency theory.3The constructive gain or loss appears on the consolidated income statement in the year in which the affiliate’s bonds are purchased.4Only the bond liability and related premium or discount held outside the consolidated entity appear on the consolidated balance sheet.©2009 Pearson Education, Inc. publishing as Prentice Hall 685No gain or loss results when an affiliate’s bonds are purchased at book value, or from direct borrowing and lending between affiliates.6Straight-line amortization of premiums and discounts is used in the examples in this textbook for simplicity. The effective interest method issuperior, but it is not required by APB Opinion No. 21 for transactions betweenparent and subsidiary companies and between subsidiaries of a common parent. PARENT COMPANY BONDS ACQUIRED BY A SUBSIDIARY (Illustration 7-1, 1,2)A When the bonds of a parent company are acquired by a subsidiary on the open market,the transaction is similar to the accounting for downstream intercompanytransactions.B The parent company is the issuing affiliate and constructive gains and losses areassigned to the parent.1At the time of purchase, the subsidiary records the investment in parent company bonds at the amount paid. No other entry is made.a The constructive gain or loss is not recorded on the books of theparent or subsidiary.b The constructive gain or loss is the difference between the bondliability accounts (p arent’s books) and the bond investment account(subsidiary’s books).C During the year, the parent amortizes the premium or discount on bonds payable onits separate books and the subsidiary amortizes the premium or discount on thebond investment on its separate books.1This amortization results in a piecemeal realization and recognition of the constructive gain or loss on the respective books of parent and subsidiary.•This piecemeal recognition of the constructive gain or loss is reflected in the interest income and interest expense accounts relating to theconstructively retired bonds.2The amount of piecemeal recognition of a constructive gain or loss is always the difference between the intercompany interest expense and interest incomeamounts that are eliminated.©2009 Pearson Education, Inc. publishing as Prentice Hall 69D At year end, the parent company adjusts its income from subsidiary and investmentaccount for the entire constructive gain or loss and any piecemeal recognition ofthat gain or loss under the equity method of accounting.1 The full amount of the constructive gain or loss is charged to investmentincome because the parent is the issuing affiliate.2When the bonds mature, the difference between the bond liability and bond investment will be fully amortized and the parent com pany’s investment insubsidiary account will be equal to the subsidiary’s underlying equity.E Consolidation procedures relating to the bonds in the year of the intercompany bondpurchase include the following:1The constructive gain or loss is recorded in the consolidation working papers because it is a gain or loss to the consolidated entity.2The reciprocal bonds payable and bond investment amounts and the related premium or discount are e liminated.3Reciprocal amounts of interest expense and interest income are eliminated.4Reciprocal amounts of interest payable and interest receivable are eliminated.F In years subsequent to the intercompany bond purchase, the parent and subsidiarycontinue to account for their respective bonds payable and investment in bonds as if the bonds were held by unaffiliated entities.1The difference between the parent’s interest expense on the intercompany bonds and t he subsidiary’s interest income on the bonds is the piecemealrecognition of the gain or loss.•However, this piecemeal gain or loss must be eliminated since the entire gain or loss to the consolidated entity was recognized in the year thebonds were purchased by the affiliate.2This difference is recognized on the parent’s books as an adjustment of investment income.3 A consolidation working paper entry eliminates reciprocal interest incomeand interest expense amounts, reciprocal bond investment and bond liabilityamounts, reciprocal interest receivable and payable amounts, and the differenceis a debit or credit to the investment account.©2009 Pearson Education, Inc. publishing as Prentice Hall 70•This debit or credit to the investment account establishes reciprocitybetween the investment in subsidiary and the subsidiary equity accounts atthe beginning of the period.SUBSIDIARY BONDS ACQUIRED BY THE PARENT COMPANY (Illustration 7-1, 3,4) A When the bonds of a subsidiary company are acquired by a parent on the open market,the transaction is similar to the accounting for upstream intercompany transactions.B The subsidiary company is the issuing affiliate and constructive gains and losses areallocated between the majority and noncontrolling interests.1At the time of purchase, the parent records the investment in subsidiary bonds at the amount paid. No other entry is made.a The constructive gain or loss is not recorded on the books of theparent or subsidiary.b The constructive gain or loss is the difference between the bondliability ac counts (subsidiary’s books) and the bond investmentaccount (parent’s books).C During the year, the subsidiary amortizes the premium or discount on bondspayable on its separate books and the parent amortizes the premium or discounton the bond investment on its separate books.1This amortization results in a piecemeal realization and recognition of the constructive gain or loss on the respective books of parent and subsidiary.•This piecemeal recognition of the constructive gain or loss is reflected in the interest income and interest expense accounts relating to theconstructively retired bonds.2The amount of piecemeal recognition of a constructive gain or loss is always the difference between the intercompany interest expense and interest incomeamounts that are eliminated.3The constructive gain or loss is allocated between the majority andnoncontrolling interests.a Only the parent company's proportionate share of the constructivegain or loss is included in consolidated net income.©2009 Pearson Education, Inc. publishing as Prentice Hall 71b The noncontrolling interest’s share of the constructive gain or loss isreflected in the consolidated income statement as noncontrollinginterest expense.c Noncontrolling interest expense is computed as the minority interestpercentage times the subsidi ary’s realized incomeD In years subsequent to the year of purchase of intercompany bonds, the portion of theconstructive gain or loss that has not been recognized through premium and discountamortization on the separate books of parent and subsidiary must be allocated betweenthe investment account and noncontrolling interest in the consolidation working papers. Description of assignment materialMinutesQuestions (12)Exercises (13)E7-1 4 MC general questions 12 E7-2 [Pavone/Showalter] 2 MC problems 10 E7-3 [Palmer/Scott] 5 MC problem-type questions (constructive gain on January 201 purchase of parent company bonds)E7-4 [Paul/Sally] Computations (subsidiary purchases parent company 10 bonds on January 1)E7-5 [Prim/Saddie] Prepare a consolidated income statement (constructive 15 gain on January 1 purchase of parent’s bonds)E7-6 [Platt/Smedley] Computations (parent purchases subsidiary bonds on 15 January 1)E7-7 [Pitt/Slick] 3 MC problem-type questions (constructive gain on January 1 15 purchase of subsidiary’s bonds)E7-8 [Partie/Saydo] Computations (midyear purchase of parent’s bonds)20 E7-9 [Picker/Skidden] Computations under different assumptions (January 1 25 purchase of parent’s bonds and subsidiary’s bonds)E7-10 [Perdue/Shelly] Computations (effect of January 1 constructive retirement 25 of parent’s bonds)E7-11 [Parrish/Sandwood] Prepare a consolidated income statement (January 1 20 constructive retirement of all subsidiary bonds)E7-12 [Public/Spede] Computations and working paper entries (parent purchases 30 subsidiary bonds)E7-13 [Pappy/Sonny] Computations and journal entries (constructive gain on 25 subsidiary’s purchase of parent bonds)Problems (6)©2009 Pearson Education, Inc. publishing as Prentice Hall 72P7-1 [Pongo/Song] Computations and working paper entries (data given at end of 25 year on const ructive retirement of parent’s bonds)P7-2 [Pewter/Steel] Four-year income schedule (several intercompany transactions) 30 P7-3 [Placid/Storm] Financial statement working papers (equity method, 70 constructive retirement of parent bonds, unrealized profit from intercompanyinventory and plant asset sales)P7-4 [Peter/Cher] Computations and the equity method with separate and 50 consolidated statements givenP7-5 AICPA [Poe/Shaw] Computations (constructive retirement of subsidiary 30 bonds on financial statement date)P7-6 [Paar/Sahl] Financial statement working papers (equity method, constructive 60 retirement of parent bonds, unrealized profit from intercompany inventoryand plant asset sales)Internet AssignmentUsing an internet search engine, locate two examples of gains or losses on extinguishments of debt. Summarize the financial statement presentation and any supplemental disclosures provided by the companies.ELECTRONIC SUPPLEMENTACCOUNTING FOR BOND TRANSACTIONS BY BOTH INVESTORS AND ISSUERS This section of the electronic supplement provides a thorough review of accounting treatment for bonds from both an investor and issuer perspective.INTERCOMPANY BOND TRANSACTIONS UNDER THE INCOMPLETE EQUITY AND COST METHODSThis section of the electronic supplement illustrates the consolidation process when the parent company accounts for its investment in subsidiary using the incomplete equity method or the cost method.Description of assignment materialProblems (6) Minutes W-1 [Pike/Sack] Prepare a consolidated balance sheet (100% pooled 20 subsidiary purchases parent company bonds on January 1)W-2 [Pile/Scud] Financial statement working papers (incomplete equity method, 50 year of acquisition and 100% owned, constructive retirement of parent’s bonds)W-3 [Plum/Star] Financial statement working papers (incomplete equity method, 60 constructive retirement of parent bonds, unrealized profit from upstreaminventory sales and downstream sale of equipment)W-4 [Pate/Surry] Prepare consolidation working papers (pooling of interests, 50 ©2009 Pearson Education, Inc. publishing as Prentice Hall 73Constructive retirement of bonds, unrealized profit from intercompanyInventory and plant assets).W-5 AICPA [Madison/Adams] Consolidated balance sheet and retained earnings 30 (pooling).W-6 [Paul/Silas] Consolidated working papers (intercompany bonds and inventory). 50 Illustration 7-1INTERCOMPANY BOND TRANSACTIONSS Acquires P BondsS is a 90% owned subsidiary of P, acquired at book value equal to fair value in 20X3. P has a $50,000, 10% bond issue outstanding that was issued at par and matures on January 1, 20X9. S acquires $10,000 of these bonds for $10,500 on January 1, 20X4. Separate incomes for 20X4 and 20X5 follow:20X4 P SSales $50,000 $30,000Interest income 900Interest expense (5,000)Other expenses (35,000) (25,900)Separate incomes $10,000 $ 5,00020X5 P SSales $60,000 $40,000Interest income 900Interest expenses (5,000)Other expenses (45,000) (35,900)Separate incomes $10,000 $ 5,000P Acquires S's BondsS is a 90% owned subsidiary of P, acquired at book value equal to fair value in 20X3. S has a $50,000, 10% bond issue outstanding that was issued at par and matures on January 1, 20X9. P acquires $10,000 of these bonds for $10,500 on January 1, 20X4. Separate incomes for 20X4 and 20X5 are as follows:20X4 P SSales $50,000 $30,000Interest income 900Interest expense (5,000)Other expenses (40,900) (20,000)Separate incomes $10,000 $ 5,00020X5 P S©2009 Pearson Education, Inc. publishing as Prentice Hall 74Sales $60,000 $40,000Interest income 900Interest expenses (5,000)Other expenses (50,900) (30,000)Separate incomes $10,000 $ 5,0001S Acquires P Bonds [$500 constructive loss - $100 piecemeal recognition] One-line consolidation entry:Investment in S $4,100Income from S $4,100To take up income from S computed as ($5,000 x 90%)$500 constructive loss + $100 piecemeal recognition ofconstructive loss.Consolidation working paper entries:a Constructive loss $ 500Interest income 900Bonds payable 10,000Investment in P bonds $10,400Interest expense 1,000 To enter constructive loss and eliminate reciprocal bondinvestment and liability amounts and bond interestincome and expense amounts.b Income from S $ 4,100Investment in S $ 4,100 To establish reciprocity.x Interest payable $ 500Interest receivable $ 500 To eliminate reciprocal interest payable and receivableamounts. (Assumes six month's interest is accrued atDecember 31.)©2009 Pearson Education, Inc. publishing as Prentice Hall 752S Acquires P Bonds[$100 piecemeal recognition of 20X4 loss]One-line consolidation entry:Investment in S $4,600Income from S $4,600To take up income from S computed as ($5,000 x 90%)+ $100 piecemeal recognition from constructive loss in 20X4. Consolidation working paper entries:a Investment in S $ 400Interest income 900Bonds payable 10,000Investment in P bonds $10,300Interest expense 1,000 To eliminate reciprocal bond investment and liabilityamounts, bond interest income and expense amounts,and adjust the investment in S account for theunamortized constructive loss.b Income from S $ 4,600Investment in S $ 4,600 To establish reciprocity.x Interest payable $ 500Interest receivable $ 500 To eliminate reciprocal interest payable and receivableamounts. (Assumes six month's interest is accrued atDecember 31.)©2009 Pearson Education, Inc. publishing as Prentice Hall 763 P Acquires S Bonds[$500 constructive loss - $100 piecemeal recognition] One-line consolidation entry:Investment in S $ 4,140Income from S $ 4,140 To take up income from S computed as: ($5,000 - $500 constructiveloss + $100 piecemeal recognition) x 90%Consolidation working paper entries:a Constructive loss $ 500Interest income 900Bonds payable 10,000Investment in S bonds $10,400Interest expense 1,000 To enter constructive loss, eliminate reciprocal bondinvestment and liability amounts, and bond interestincome and expense amounts.b Income from S $ 4,140Investment in S $ 4,140 To establish reciprocity.x Interest payable $ 500Interest receivable $ 500 To eliminate reciprocal interest payable and receivableamounts. (Assumes six month's interest is accrued atDecember 31)©2009 Pearson Education, Inc. publishing as Prentice Hall 774 P Acquires S Bonds[$100 piecemeal recognition of 20X4 loss]One-line consolidation entry:Investment in S $ 4,590Income from S $ 4,590To take up income from S computed as ($5,000 + $100piecemeal recognition of constructive loss) x 90%Consolidation working paper entries:a Investment in S $ 360Noncontrolling interest-beginning 40Interest income 900Bonds payable 10,000Investment in P bonds $10,300Interest expense 1,000 To eliminate reciprocal bond investment and liabilityamounts, bond interest income and expense amounts,and adjust the investment in S and noncontrollinginterest for the unamortized constructive loss.b Income from S $ 4,590Investment in S $ 4,590 To establish reciprocity.x Interest payable $ 500Interest receivable $ 500 To eliminate reciprocal interest payable and receivableamounts. (Assumes six month's interest is accrued atDecember 31.)©2009 Pearson Education, Inc. publishing as Prentice Hall 78。
高级会计学(第10版)教师手册 Beams10e_IM02
Chapter 2STOCK INVESTMENTS - INVESTOR ACCOUNTING AND REPORTING Chapter OutlineACCOUNTING FOR STOCK INVESTMENTSA The equity method is required for investments of 50% or less that give the investor anability to exercise significant influence over the investee.Illustration 2-1 Accounting for Investments% ownership Normal Accounting Method0 - 19 Cost (adjusted to FMV as appropriate)20 - 50 Equity(presumed significant influence)51 & up Consolidated Financial Statements (assumed controlling interest) (FASB 94)B In the absence of evidence to the contrary, an investment of 20% or more is presumedto give the investor an ability to exercise significant influence. This is a rebuttable presumption.1The equity method should not be used if the ability to exercise significant influence is temporary or if the investee is a foreign company operating undersevere exchange restrictions or controls.2FASB Interpretation No. 35 provides indicators of when the ability to exercise significant influence may be impaired:a Opposition by the investee that challenges the investor’s influenceb Surrender of significant stockholder rights by agreement betweeninvestor and investeec Concentration of majority ownership©2009 Pearson Education, Inc. publishing as Prentice Hall 13d Inadequate or untimely information to apply the equity methode Failure to obtain representation on the investee’s board of directorsC The fair value/cost method is used for common stock investments of less than 20%unless it can be demonstrated that the investor company has the ability to exercisesignificant influence over the investee company.ACCOUNTING FOR NONCURRENT COMMON STOCK INVESTMENTS UNDER THE FAIR VALUE/COST METHOD:A If the stock is marketable, the investment should be accounted for at fair valueaccording to the provisions of FASB Statement No. 115,“Accounting for Certain Investments in Debt and Equity Securities.”1Investment is initially recorded at cost2The investment is adjusted to fair value at the end of the fiscal period3Unrealized gains or losses are reported either in income or as an equity adjustment to the balance sheet, depending on the company’s intention forholding the stock4Unrealized gains and losses associated with ‘trading’ securities are recorded as part of incomea Trading securities are very short term holdings, continued relationshipsare not expected.5Unrealized gains and losses associated with ‘available for sale’ securities are considered “other comprehensive income” and are reported on the balancesheet as an equity adjustment.a Only dividend income and realized gains and losses impact incomeand EPS for available for sale securitiesB If the stock is not marketable, the investment is accounted for using the cost method1Investment is initially recorded at cost2Dividends received are recorded as dividend incomea An exception: Liquidating dividends are deducted from theinvestment account. Liquidating dividends are those dividends received ©2009 Pearson Education, Inc. publishing as Prentice Hall 14in excess of the investor’s share of earnings after the stock is acquiredand are considered a return of capital.THE EQUITY METHOD AND FASB STATEMENT NO. 94 FOR ACCOUNTING FOR INVESTMENTS IN COMMON STOCK UNDER THE EQUITY METHODA FASB Statement No. 941Current GAAP requires consolidation of all majority-owned subsidiaries, except those for which control is temporary or does not rest with the parentcompany.2An investment in an unconsolidated subsidiary is reported in the parent company’s financial statements using the cost or eq uity method, accordingto the parent’s ability to exercise significant influence (more coverage in chapter3).B Application of the equity method1The investment is initially recorded at cost2Subsequently, the investor records its share of the investee’s income as an increase to the investment account (losses will decrease the investmentaccount)3Dividends received from the investee are recorded as a decrease to the investment accounta The investment account moves in the same direction as the inves tee’snet assets (for example, income increases assets for both)4 Additional adjustments are requireda Intercompany profits and losses are eliminated until realized.b Cost-book value differentials are accounted for as if the investee werea consolidated subsidiary(1)The difference between the investment cost and theunderlying equity is assigned to identifiable assets andliabilities based on their fair values with any remainingdifference allocated to goodwill.©2009 Pearson Education, Inc. publishing as Prentice Hall 15(2)The difference between investment cost and book valueacquired will disappear over the remaining lives ofidentifiable assets and liabilities, except for amountsassigned to land, goodwill, and intangible assets having anindeterminate life, which are not amortized.(3)If the book value acquired is greater than the investmentcost, the difference should be allocated against non-currentassets other than marketable securities with any remainingamount treated as an extraordinary gain (negative goodwill).c The investment is reported on one l ine of the investor’s balance sheet andincome on one line of the investor’s income statement, a one-lineconsolidation(1) Except extraordinary and other below-the-line itemsC Accounting for an interim investment1Absent evidence to the contrary, income of the investee is assumed to be earned proportionately throughout the year2The investee’s book value at an interim date is determined by adding income earned from the last statement date to beginning stockholders’ equity anddeducting dividends declared to the date of purchaseD Investments acquired step-by-step1An investor may acquire significant influence through a series of purchases2Prior to obtaining significant influence, the fair value/cost method is used.When an investment qualifies for the equity method, the investment account isadjusted to the equity method and the investor’s retained earnings areadjusted retroactively.a This is a change in reporting entity and is requires retroactiverestatement if materialE Sale of an equity interest1When an investor reduces its equity interest in an investee to below 20%, the retained investment is accounted for under the fair value/cost method©2009 Pearson Education, Inc. publishing as Prentice Hall 16a Gain or loss from the equity interest sold is the difference between theselling price and the book value of the equity interest immediately beforethe saleb Immediately after the sale, the balance of the investment accountbecomes the new cost basisF Investees with preferred stock1Special adjustments are necessary when investees have both common and preferred stock outstanding2Investee’s stockholders’ equity must be allocated into its common and preferred stock components3Investee’s net income must also be allocated into common and preferred stock components4Call or liquidating premiums and dividends in arrears must also beconsidered5F urther coverage in Chapter 10DISCLOSURES FOR EQUITY INVESTMENTSA Material investments accounted for by the equity method require disclosure of1Summarized information about the investee’s assets, liab ilities, and results of operations in financial statement notes2The investee’s name and percent of ownership in common stock, the investor’s accounting policies with respect to investments in common stock,the cost/book value differentials and accounting treatment3The aggregate value of each identified investment for which quoted market prices are availableB Related party transactions1Related party transactions arise when one of the transacting parties has the ability to significantly influence the operations of the other2 There is no presumption of arms-length bargaining between the relatedparties©2009 Pearson Education, Inc. publishing as Prentice Hall 173 Required disclosures include the nature of the relationship, a description ofthe transaction, the dollar amount of the transaction (and any change in themethod used to establish the terms of the transaction), and amounts due to ordue from related parties at the balance sheet date for each balance sheetpresented.TESTING GOODWILL FOR IMPAIRMENTA FASB Statement No. 142 eliminates former requirements to amortize goodwill, rather,goodwill must be periodically tested for impairment1Firms may find this valuable for two reasonsa Firms may recognize significant impairment losses on initialadoption which are treated as a “cumulative effect of an accoun tingchange” (appears after “income from operations”)b Firms will no longer report annual goodwill expense chargesB Recognizing and measuring impairment losses is a two-step process1First, carrying value is compared to fair value at the business reporting unit levela If fair value is greater than carrying value, goodwill is deemedunimpaired and no further action is necessaryb If carrying value is greater than fair value, the firm proceeds to step22 Step 2, when necessary, requires a comparison of the carrying value ofgoodwill with its implied fair value3 The implied fair value of goodwill is determined in the same manner used tooriginally record the goodwill at the business combination datea Allocate the fair value of the reporting unit to all identifiable assets andliabilities as if they had made the purchase on the measurement date, andany excess is the implied fair value of goodwill4The fair value of the reporting unit is the amount for which it could be purchased or sold in a curren t, arm’s-length transaction©2009 Pearson Education, Inc. publishing as Prentice Hall 18a Current market prices (in an active market) are considered the mostreliable indicator of fair valueC Goodwill impairment testing must be done at least annually1More frequent testing may be required if certain events occur such as adverse changes in the legal or business climate, new and unanticipatedcompetition, loss of key personnel, and other similar eventsD Reporting and disclosure1Material aggregate amounts of goodwill must be reported as a separate line item on the balance sheet2 Goodwill impairment losses are shown separately in the income statement ©2009 Pearson Education, Inc. publishing as Prentice Hall 19E Equity method investments1Many of the rules regarding goodwill in purchase method businesscombinations (parent acquiring a controlling interest in a sub) also apply togoodwill arising from use of the equity method2One notable exception is the rule regarding goodwill impairmentsa Impairment tests for equity investments continue to follow guidancefrom APB Opinion No. 18 which require impairment tests beperformed based on fair value versus book value of the investmenttaken as a wholeNEW STANDARD – FAS Statement 159 – The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 1151)Firms have option to record equity method investments at fair value. The optionmay be elected on an investment by investment basis.2)Option must continue as long as investment is owned.3)Fair Value is recalculated annually. Changes are included in investor’s net incomewith the offsetting cumulative amount recorded in a valuation allowance.4)Separate disclosure is required.Description of assignment material Minutes Questions (14)Exercises (16)E2-1 5 MC general 10E2-2 AICPA 8 MC general and problem-type 35E2-3 [Trevor/Bowman] Calculate percentage ownership and goodwill from 12 investment acquired directly from investeeE2-4 [Carson/Medley] Calculate income for 30% midyear investment 15E2-5 [Dokey/Oakey] Calculate income and investment balance for 40% full 15 year investment with allocation of excess to undervalued assetsE2-6 [Martin/Neighbors] Journal entry to record income from 40% investee with 10 loss from discontinued operationsE2-7 4 MC problem-type 20E2-8 [Raython/Treaton] Calculate investment balance 4 years after acquisition 15E2-9 [Nickie/Runner] Calculate income from investee and the investment 20 balance when the investee’s capital structure includes preferred stock©2009 Pearson Education, Inc. publishing as Prentice Hall 20E2-10 [Arbor/Tree] Calculate income and investment balance for 25% midyear 15 investmentE2-11 [Ratterman/Twizzle] Adjust investment account and determine investment 25 income when an additional investment qualifies investee for the equitymethod of accountingE2-12 [River/Tall] Journal entries (investment in previously unissued stock) 15E2-13 [BIP/Crown] Prepare journal entries and an income statement, and 20 determine the investment account balance (investee with extraordinaryloss)E2-14 [Valley/Water] Calculate income and investment account balance 20 (investee has preferred stock)E2-15 [Park/Steele] Calculate implied fair value of goodwill 10 E2-16 [Flash/Alpha/Beta] Calculating and reporting impairment lossesin the income statement 10 Problems (16)P2-1 [Ritter/Telly] Computations for a midyear purchase (investee has 25 an extraordinary gain)P2-2 [Putter/Siegal] Journal entries for midyear investment (cost and 20 equity methods)P2-3 [Vatter/Zelda] Computations for 30% investee (excess allocated 20 to inventories, building, and goodwill)P2-4 [Diller/Dormer] Journal entries for midyear 40% investment (excess 20 allocated to land, equipment, and goodwill)P2-5 [Earth-Q/Tremor] Prepare an allocation schedule, compute income 15 and the investment balanceP2-6 [Pauly/Stapleton] Computations (midyear acquisition) 20 P2-7 [Dill/Larkspur] Partial income statement (investee with extraordinary item) 10 P2-8 [Hazel/Brady] Step-by-step acquisition of equity interest over several 25 years and purchase of stock from investeeP2-9 [Provo/Sigma] Computations and journal entries (excess book value over 20 cost)P2-10 [Creape/Tantani] Prepare allocation schedules under two different stock 20 market price assumptions (negative goodwill)P2-11 [Prudy/Spandix] Computations (piecemeal acquisition of investment) 25 P2-12 [Pilot/Sassy] Computations and a correcting entry (errors) 25 P2-13 [Publican/Samaritan] Allocation schedule and computations (excess cost 25 over fair value)P2-14 [Publican/Samaritan] Allocation schedule and computations (excess fair 30 value over cost)P2-15 [Cooper] Calculating and reporting impairment losses 10 P2-16 [Cardinal] Calculating and reporting impairment losses and recoveries 10 ©2009 Pearson Education, Inc. publishing as Prentice Hall 21Internet assignmentFord’s 2006 annual report is used to study Ford’s intercompany investments. Case StudyCoca Cola’s 2006 annual report is used to understand the equity method.©2009 Pearson Education, Inc. publishing as Prentice Hall 22。
高级会计学(第10版)教师手册 Beams10e_IM12
Chapter 12DERIVATIVES AND FOREIGN CURRENCY TRANSACTIONSChapter OutlineA FASB Statement No. 52, “Foreign Currency Translation,” as amended by FASBStatement No. 133, stipulates1At the date a transaction is recognized, each element shall be measured and recorded in the functional currency of the recording entity using theexchange rate in effect on that date2At each balance sheet date, recorded balances that are denominated in a foreign currency shall be adjusted to reflect the current exchange rate.B Definitions of currencies from FAS 52:1An entity’s functional currency is the currency of the primary environment in which it operates. This is normally the currency in which it generates andexpends cash. Company management determines the functional currency.2Foreign currency is a currency other than the entity’s functional currency.3Local currency is the currency of a particular country being referred to.4Reporting currency is the currency in which an enterprise prepares its financial statements.C A transaction is measured in a particular currency if its magnitude is expressed in thatcurrency and included in the financial records in that currency.1Assets and liabilities are denominated in a currency if their amounts are fixed in terms of that currency and will be settled in that currency.a For example, US Company buys merchandise from a Mexican firm for500,000 pesos, payable in 10 days. The transaction is denominated inpesos; however, US Company must measure the purchase in USdollars before it can be recorded. This is done through the use ofexchange rates.©2009 Pearson Education, Inc. publishing as Prentice Hall 129D An exchange rate is the ratio between a unit of one currency and the amount of anothercurrency for which that unit can be exchanged. From the viewpoint of a U.S. company:1 A direct quotation is expressed in U.S. dollars. It is the U.S. dollar equivalentof 1 unit of a foreign currency.a A direct quotation for Mexican pesos might be $.1333. The purchasedenominated at 500,000 pesos is measured at $66,650 U.S. dollars(500,000 pesos x $.1333).2An indirect quotation is expressed in the foreign currency. It is the foreign currency equivalents to one U.S. dollar.a An indirect quotation for Mexican pesos is expressed as 7.5019 pesos.The 500,000 pesos purchase is measured at $66,650 (500,000 pesos /7.5019 pesos).3 A spot rate is the exchange rate for immediate delivery of currenciesexchanged.4The current rate is the rate at which one unit of currency can be exchanged for another currency at the balance sheet date or the transaction date.5The historical rate is the rate in effect at the date a specific transaction or event occurred.FOREIGN EXCHANGE TRANSACTIONS OTHER THAN FORWARD CONTRACTS A Foreign exchange transactions are transactions whose terms are denominated in acurrency other than an entity’s functional currency.1 A foreign transaction is a transaction between entities in different countries. Thetransaction is a foreign currency transaction only if it is denominated in aforeign currency from a U.S. firm’s viewpoint.2International transactions denominated in U.S. dollars are not foreign currency transactions from a U.S. firm’s viewpoint.B FAS 52 requirements for foreign currency transactions:1The transaction is translated into U.S. dollars at the spot rate in effect at the transaction date.©2009 Pearson Education, Inc. publishing as Prentice Hall 130a An exchange gain or loss results when the exchange rate changesbetween the transaction date and the settlement date.b An exchange gain or loss occurs only when the transaction isdenominated in a foreign currency.2At the balance sheet date, recorded balances that are denominated in a foreign currency are adjusted to the current exchange rate.a The difference between the recorded balance and the adjusted balance atthe balance sheet date is the exchange gain or loss to be included incurrent income.FOREIGN CURRENCY DERIVATIVES AND HEDGING ACTIVITIESA A derivative is the name given to a broad range of financial securities whose commoncharacteristic is that the derivative contract’s value to the investor is related tofluctuations in price, rate, or some other variable that underlies it. A hedgecontract is a form of derivative. Statement No. 133 establishes three definingcharacteristics for a derivative:1 one or more underlyings and one or more notional amounts or payment provisions orboth2 no initial investment or one that is smaller than required for other similar contracts3 net settlement required or permitted, can readily be settled net outside the contract, orasset delivery provision.For hedged items and the associated derivatives, formal documentation must beprepared at the hedge inception.NEW STANDARD – Statement of Financial Accounting Standards No. 161 –Disclosures about Derivative Instruments and Hedging Activities (an amendment of FASBStatement No. 133):A Requires enhanced disclosure about:1) how and why an entity uses derivative instruments,2) how derivative instruments and related hedged items are accounted for underStatement 133 and its related interpretations, and3) how derivative instruments and related hedged items affect an entity, financialposition, financial performance, and cash flows.©2009 Pearson Education, Inc. publishing as Prentice Hall 131B A hedging operation is the purchase or sale of a foreign currency contract to offset therisks of holding receivables and payables denominated in a foreign currency.1 The most common types of price and rate risks that companies hedgeinclude interest rates, commodity prices, stock prices, and foreign currencyexchange rates.2Option, forward, and futures contracts are considered derivative instruments and accounted for according to FASB Statement No. 133“Accounting for DerivativeInstruments and Hedging Activities”.C A forward contract is an agreement between two parties to exchange differentcurrencies or a commodity at a specified future date and at a pre-agreed price andquantity.1 A futures contract shares essentially the same characteristics as a forwardcontract, but is standardized allowing it to be easily traded in markets.2The accounting for forward exchange contracts depends on the nature and purpose of the hedge.3FASB Statement No. 133 identifies speculations, fair value hedges, and cash flow hedges.4The agreement may require actual physical delivery of the good or a net settlement – allows payment of money.D Options are a common hedging instrument in which only one of the contractingparties is required to perform while the other party has the ability, but not theobligation, to performE For hedged items and the derivative instruments designated to hedge them toqualify for hedge accounting, documentation at the inception of the hedge must be prepared.1Among other things, this documentation describes the relationship between the hedged item and the derivative, and the risk management objective andstrategy the company is achieving through the hedging relationship.2Once a type of risk is identified that qualifies for hedge accounting, theeffectiveness of the hedge is assessed both at the inception of the hedge andduring the hedge’s existence.©2009 Pearson Education, Inc. publishing as Prentice Hall 132F One of three types of hedge accounting must be used to account for the derivative andthe related hedge item1Fair value hedge accounting is used when the item being hedged is an existing asset or liability position and firm purchase or sale commitments. Both theasset being hedged and the derivative are marked to fair value and the gainor loss is immediately recognized in earnings.2Cash flow hedge accounting hedges the exposure to variability in expected future cash flows associated with that risk. The effective portion of the relatedgain or loss’ recognition is deferred until the forecasted transaction affectincome.a The gain or loss in included as a component of Accumulated OtherComprehensive Income (AOCI).3Hedge of a net investment in a foreign subsidiary, which is covered in chapter13.4See the Green Company example in the text.G The accounting for derivative instruments and hedging activities under SFAS 133 isaimed at reflecting the underlying economic reality of the hedging relationship. EXAMPLE OF HEDGESA Fair value hedges1 Hedge of an exposed net asset position or net liability positiona An exposed net assets position is an excess of assets denominated inforeign currency over liabilities denominated in that currency andtranslated at the current rate.b To hedge the exposed net asset position, a firm enters into a forwardcontract with an exchange broker to sell foreign currency for futuredelivery.(1)The contract receivable with the exchange broker will be stated in U.S.dollars at the forward rate. This part of the contract will not changewith changes in the exchange rate.(2)The contract payable to the exchange broker is denominated in theforeign currency and it is measured and recorded at the forwardrate throughout the life of the contract.©2009 Pearson Education, Inc. publishing as Prentice Hall 133(3)Under FAS 52 provisions, receivables and payables denominated inforeign currency must be adjusted to the current spot rate at thebalance sheet date. Thus, the contract payable is adjusted to theforward rate at the balance sheet date and the original account receivableis adjusted to the spot rate at the balance sheet date.(i) A gain or loss on the net asset position will be offset by thegain or loss on the forward contract.(ii)The income effect of the hedge is the amount of the change inthe spot rate that is not exactly offset by a correspondingchange in the forward rate.(4) The change in the derivative instrument must also be discounted backfrom the maturity date since that is when the gain or loss will actuallyoccur.c An exposed net liability position is an excess of liabilities denominatedin a foreign currency over assets denominated in the same currencyand translated at the current rated To hedge the exposed net liability position, a firm enters into a forwardcontract with the exchange broker to purchase foreign currency forfuture receipt.(1)The contract receivable is denominated in foreign currency and it ismeasured and recorded at the forward rate throughout the life of thecontract..(2)The contract payable is stated in U.S. dollars at the forward rate and willnot change with changes in the exchange rate.(3)The gain or loss on the original liability offsets the opposite gain orloss on the contract receivable.2Hedging an identifiable foreign currency commitment:a A foreign currency commitment is a contract or agreement that willresult in a foreign currency transaction at a later date.(1)The U.S. firm has an exposure to exchange rate changes, but acommitment has not been entered in the accounts as an asset orliability.©2009 Pearson Education, Inc. publishing as Prentice Hall 134b A forward exchange contract is a hedge of an identifiable foreigncurrency commitment if it is both intended and effective as a hedge ofthe commitment and the commitment is firm.(1)The forward exchange contract with the exchange broker is initiallyrecorded the same as a hedge of an exposed net asset or liabilityposition, and the contract receivable or payable denominated in foreigncurrency must be adjusted on the balance sheet date to the future rate atthe balance sheet date.(2)The recorded gain or loss on the hedge needs to be offset by acorresponding gain or loss on the underlying transaction. Since theunderlying transaction is not recorded, a new account must be set upto record the change in value of the unrecorded underlyingtransaction.(3)When the underlying firm commitment is executed, the change in valueis incorporated in the amount of the purchase or sale that the companywas hedging.B Cash flow hedges hedge a forecasted foreign currency transaction.1With a forecasted transaction there are no grounds for adjusting a non-existent underlying transaction.a Still the derivative contract must be carried at fair value. The offsetto the change in the fair value of the derivative is, therefore, othercomprehensive income.2 When the anticipated transaction comes to fruition, the other comprehensiveincome account is closed into the purchase or sales amount. If theanticipated transaction fails to materialize, the gain or loss is recognized innet income.C A forward exchange contract that speculates in foreign currency exchange pricemovements is valued at forward rates throughout the life of the contract. All gainsand losses on the contract are included in current income.International Accounting Standards:A Certain International Accounting Standards are relevant:1) 21 – addresses how to include foreign currency transactions and foreignoperations in the financial statements.2) 32 – terms are defined.3) 39 – deals with derivatives.©2009 Pearson Education, Inc. publishing as Prentice Hall 135Description of assignment material Minutes Questions (20)Exercises (18)E12-1 [Jolly Rice] Journal entries for a hedge 15 E12-2 [Jolly Rice] Journal entries for a hedge of a firm purchase commitment 15 E12-3 [Brookings] Entries for a firm sales commitment and a forward contract 15 E12-4 [Wilson] Entries for hedge of an existing asset 15 E12-5 6 MC general questions (FASB Statement No. 52 concepts) 12 E12-6 [Zimmer] Short answer questions 12 E12-7 [Aviator] Journal entries for a purchase denominated in foreign currency 12 E12-8 [Wick] Determine exchange gain or loss for two years from sale 10 denominated in foreign currencyE12-9 [Door] Journal entries for a sale transaction using indirect quotations 10 E12-10 AICPA 4 short problem-type questions 16 E12-11 [Monroe] Calculate exchange gain or loss at year end and at settlement 12 E12-12 [American TV] Journal entries (purchase and sale transactions, year- 20 end adjustments, and payment and collection of accounts)E12-13 [Hayes] Journal entries for purchase transaction and forward contract 20 to hedge net liability positionE12-14 [Target] Computations (hedge of net liability position) 10 E12-15 [Cardinal] AICPA problem type questions (forward contracts) 12 E12-16 [Ace Foundry/Windsor] Journal entries for hedge of sale commitment 25 and settlementE12-17 [Import Bazaar] Journal entry to record hedge of a purchase 10 commitment; also a question on year-end adjustmentE12-18 [Martin] Journal entries for speculation in Swiss Euros 16 Problems (11)P12-1 [Northwest Gas Works] Determine appropriate hedge accounting, prepare 25 journal entriesP12-2 [Instrument Works] Determine appropriate hedge accounting, prepare 30 journal entriesP12-3 [Campion] Determine if hedge accounting applies, calculate fair value, prepare 30 journal entries.P12-4 [Lincoln International] Calculate year-end exchange gain or loss; calculate 30 receivables and payables in balance sheet; journal entriesP12-5 [Shelton] Calculate receivables, payables, exchange gains and losses, and 20 account for a hedge of a net asset or liability amountP12-6 [Campion] Determine appropriate hedge accounting, calculate fair value, 30 prepare journal entriesP12-7 [Baylor/Rameau] Journal entries at year end and collection 20 ©2009 Pearson Education, Inc. publishing as Prentice Hall 136P12-8 [Flex-American] Journal entries to hedge a purchase commitment and 22 settlementP12-9 [Bateman/Ramsay] Journal entries to hedge a foreign currency sales 22 commitment and settlementP12-10 [Marlington] Journal entries to hedge a net liability position 25 Internet AssignmentUsing Xerox Corporation’s 2003 annual report from their website, answer questions relating to derivative and foreign currency transactions.©2009 Pearson Education, Inc. publishing as Prentice Hall 137Illustration 12-1Overview of FASB Statement No. 52 ProvisionsRelating to Foreign Currency Concepts and Transactions OBJECTIVES OF TRANSLATION* To provide information compatible with the expected economic effects of a rate change on the cash flows and equity of an entity, and* To measure the financial results and relationships of individual consolidated entities in their functional currencies and reflect them in consolidated financial statements inaccordance with U.S. GAAP.FOREIGN CURRENCY CONCEPTSFunctional currency - The currency of the primary environment in which an entity operates. Generally, this is the currency in which the entity generates and expends cash.Foreign currency - A currency other than the functional currency of the entity to which reference is made.Local currency - Currency of the country in which the entity is located.Recording currency - Currency of the country in which the accounting records are maintained.Reporting currency - Currency in which an enterprise prepares its financial statements. [Note that enterprise refers to the firm preparing the combined, consolidated, or equity method financial statements, i.e., the parent/investor company.]CURRENCY EXCHANGE RATESSpot rate - The exchange rate for immediate delivery of currencies exchanged.Current rate - The rate at which one unit of currency can be exchanged for another currency at the balance sheet date or the transaction date.Historical rate - The rate in effect at the date a specific transaction or event occurred.FOREIGN CURRENCY TRANSACTIONSA transaction is a foreign currency transaction if its terms are denominated in a foreign currency; that is, if its terms are fixed in a currency other than the entity’s functional currency.©2009 Pearson Education, Inc. publishing as Prentice Hall 138FOREIGN CURRENCY TRANSACTIONS OTHER THAN FORWARD CONTRACTS * Measured at the spot rate on the transaction date* Adjusted to the current rate at the balance sheet date and gain or loss is recognized* Upon settlement, gain or loss is recognized for the difference between the settlement amount and the book value of the receivable or payableDERIVATIVE INSTRUMENTS (FORWARD CONTRACTS) (FASB Statement No. 133) TREATED AS A SPECULATION* Measured at forward exchange rates during the contract life* Gains and losses (discounted) are recognized currently based on forward exchange rates * Upon settlement, gain or loss is recognized for the difference between the settlementamount and the book value of the contract receivable or payableFORWARD CONTRACTS TO HEDGE A NET ASSET OR LIABILITY POSITION* Measured at forward exchange rates throughout the contract life* Gains and losses are recognized currently, but they offset the gains and losses on the related assets or liabilities (to the extent that the spot and forward rates move in tandem)* Upon settlement, gains and losses are recognized as the difference between the settlement amount and the book value of the contract receivable or payableFORWARD CONTRACTS TO HEDGE AN IDENTIFIABLE COMMITMENT* Measured at forward exchange rates throughout the contract life* Gains and losses are recognized but an offsetting gain or loss is set up as a change in the value of the underlying firm commitment* Upon settlement, the change in the value of the firm commitment is treated as an adjustment of the transaction amountFORWARD CONTRACT TO HEDGE AN ANTICIPATED TRANSACTION* No basis to adjust an anticipated transaction, however the derivative must be carried at fair value*The offset to the change in value of the derivative is recorded as other comprehensive income•At fruition the other comprehensive income adjusts the underlying transaction amount.If the anticipated transaction is cancelled, the gain or loss is transferred to net income.©2009 Pearson Education, Inc. publishing as Prentice Hall 139Illustration 12-2DIRECT AND INDIRECT QUOTATIONSDirect quotation is expressed in U.S. dollars. It is the U.S. dollar equivalent of 1 unit ofa foreign currency.An indirect quotation is expressed in the foreign currency. It is the foreign currency equivalent of 1 U.S. dollar.A direct quotation for French francs on October 31, 20X6 is $.20. One French franccan be purchased for $.20.$.20/1 = $.20The indirect quotation for French francs on October 31, 20X6 is 5 francs. One U.S.dollar can be purchased with 5 francs.1/$.20 = 5 francsINTERPRETATION OF FOREIGN EXCHANGE RATE CHANGES Case 1The British pound is quoted at $1.50 against the U.S. dollar on January 15, 20X6 and at $1.40 on March 15, 20X6. Is the U.S. dollar strengthening or weakening against the British pound?The U.S. dollar is strengthening. The cost to a U.S. company of 1 British pound onJanuary 15 was $1.50, but only $1.40 on March 15.Case 2The German mark is quoted at $.45 on April 10, 20X7 and at $.50 on May 10, 20X7.Is the dollar strengthening or weakening against the German mark?The U.S. dollar is weakening. The cost of 1 mark on April 10 was $.45, but on May 10, it was $.50. Alternatively, a U.S. firm could have obtained 222 marks for $100 on April 10, but only 200 marks for $100 on May 10.©2009 Pearson Education, Inc. publishing as Prentice Hall 140。
高级会计学(第10版)教师手册 Beams10e_IM11
Chapter 11CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, ANDCORPORATE JOINT VENTURESChapter OutlineCONSOLIDATION UNDER PARENT COMPANY AND ENTITY THEORIES (Illustration 11-1)A Contemporary theory evolved from practice and it essentially an entity approach tothe preparation of consolidated financial statements.B Traditional theory reflected parts of both the parent-company theory and the entitytheory.C Underlying assumptions of the parent company theory are summarized as follows:1The viewpoint is that consolidated financial statements are an extension of parent company statements and are prepared from the viewpoint of parentcompany shareholders.2Consolidated net income is a measure of income to the parent company stockholders.3Noncontrolling interest is a liability from the viewpoint of parent company shareholders.4Similarily, noncontrolling interest expense is considered an expense from the viewpoint of the majority shareholders.5Subsidiary assets and liabilities are initially consolidated at their book values plus the parent’s share of any excess of fair value over book value.a Subsidiary net assets are revalued only to the extent acquired by theparent company.6The noncontrolling interest in subsidiary assets and liabilities isconsolidated at book value.7All unrealized gains and losses from downstream intercompany sales are eliminated until realized.©2009 Pearson Education, Inc. publishing as Prentice Hall 1158Unrealized gains and losses from upstream intercompany sales areeliminated to the extent of the parent company ownership interest.a The amount not eliminated is considered realized for noncontrollingshareholders.D Underlying assumptions of the entity theory are summarized as follows:1The viewpoint is that of the consolidated entity as a whole.a The consolidated statements should provide information for allinterest holders.2Total consolidated net income is a measurement of income to all equity stockholders, and it is allocated in the financial statements to majority andnoncontrolling interests.3Noncontrolling interest is an equity interest shown in the stockholders’ equity section of the consolidated balance sheet.4Subsidiary assets and liabilities are consolidated at their fair values.5 A total subsidiary value is imputed from the price paid by the parentcompany for its majority interest.6All unrealized gains and losses from downstream intercompany sales are eliminated until realized.7Unrealized gains and losses on upstream intercompany sales are eliminated by allocating them proportionately to majority and noncontrolling interests.E See Exhibit 11-1 in the text for a comparison of consolidation theories.F Consolidated Stockholders Equity: Contemporary theory differs slightly from entitytheory in reporting consolidated stockholders equity. Under entity theory, bothcontrolling and noncontrolling interests are components of consolidated equity.Further, entity theory would show the components of each interest, i.e., breaking thecontrolling and noncontrolling interests into their respective shares of contributedcapital and retained earnings. Under SFAS No. 160, the noncontrolling interest isshown as a single, combined amount under consolidated stockholders equity.©2009 Pearson Education, Inc. publishing as Prentice Hall 116PARENT COMPANY ACCOUNTING UNDER THE EQUITY METHODA Parent company and entity theories do not affect parent company accountingunder the equity method.1This is because the extra values under entity theory were reflected in the noncontrolling interest, not the majority interest.B The separate company statements will be the same for the parent and subsidiaryunder both theories.C Consolidated statements are affected, however, and different amounts are likely forconsolidated assets, liabilities, and noncontrolling interests.PUSH-DOWN ACCOUNTING (Illustration 11-2)A Under push-down accounting, the fair values of an acquired subsidiary’s assets andliabilities are recorded in the separate financial statements of the purchasedsubsidiary.1The SEC requires push-down accounting in its filings when a subsidiary is substantially wholly owned (usually 97%) with no substantial publicly helddebt or preferred stock outstanding.2Push-down accounting affects only the subsidiary’s separate financial statements.a Without push-down accounting, the allocation of the purchase price toidentifiable assets and goodwill is done in the consolidation workingpapers.b Under push-down accounting, the allocation is done on the books of thesubsidiary.c Consolidated financial statements are exactly the same under eitherprocedure.B Supporters of push-down accounting are not in agreement regarding1The percentage ownership necessary for push-down accounting, and2Whether the allocation should reflect 100% of the fair values of the subsidiary’s assets and liabilities if less than a 100% change in ownership hasoccurred.©2009 Pearson Education, Inc. publishing as Prentice Hall 117C Push-down accounting can be applied under either parent company theory or entitytheory.1 Push-down accounting under parent company theory:a Cost/book value differentials are allocated in the usual manner.b The values from the allocation schedule are pushed down to thesubsidiary records. The subsidiary makes a journal entry to revalueassets and liabilities, eliminate retained earnings, and enter push-downcapital.(1)For example, if a 90% interest is purchased, 90% of thedifference between cost and fair value is pushed down to thesubsidiary’s books.2Push-down accounting under entity theory:a A total value of the subsidiary is imputed from the price paid by theparent for the interest acquired.(1)The excess implied value over the book value of thesubsidiary’s net assets is assigned to the individual assets andliabilities on the basis of 100% of the fair value/book valuedifferentials and the remainder to goodwill.(2)For example, if a 90% interest is purchased, 100% of theimplied value (difference between cost and fair value) is pusheddown to the subsidiary’s books.b The subsidiary makes a journal entry to revalue assets and liabilities,eliminate retained earnings, and record push-down capital.JOINT VENTURESA Joint ventures are business entities that are owned, operated, and jointly controlledby a small group of investors (venturers) for the conduct of specific businessundertakings that provide mutual benefit for each of the venturers.1 No single venturer controls the operations.B Joint ventures may be organized as corporations, partnerships, or undivided interests.The AICPA’s SOP 78-9 defines the following forms of joint ventures: ©2009 Pearson Education, Inc. publishing as Prentice Hall 1181 A corporate joint venture is a corporation owned and operated by a smallgroup of venturers to accomplish a mutually beneficial venture or project.a Venturers that can participate in the management of the corporatejoint venture and hold no more than 50% interest in the ventureaccount for their interest by the equity method.b A corporation that is a subsidiary of another corporation is not acorporate joint venture.(1) The subsidiary is consolidated in the financial statements ofthe majority owner. The other investors account for theirinvestments under the equity method.2Unincorporated joint ventures include the following:a A general partnership is an association in which each partner hasunlimited liability. A limited liability partnership is an association inwhich one or more general partners have unlimited liability and one ormore partners have limited liability.(1)Although APB Opinion No. 18 applies only to investments incommon stock, Interpretation No. 2 concluded that many of theprovisions of the equity method from APB 18 should be appliedto investments in unincorporated joint ventures.(2)Partnership profits and losses accrued by the venturers aregenerally reflected in the partners’ financial sta tements.(3)The elimination of intercompany profits and losses is generallyappropriate.b An undivided interest is an ownership arrangement in which two ormore parties jointly own property and title is held individually to theextent of each part y’s interest. Each venturer is proportionatelyliable for the venturer’s share of each liability.(1)Some undivided interests are accounted for in the same manneras partnership joint venturers.(2)Others follow specialized industry practices in which eachventurer accounts for its pro rata share of the assets, liabilities,revenues, and expenses of the joint venture in its own financialstatements. This is called pro rata or proportionateconsolidation.©2009 Pearson Education, Inc. publishing as Prentice Hall 119VARIBALE INTEREST ENTITIESA The FASB coined the term variable interest entity in FIN 46(R)1 A variable interest entity (VIE) is a special purpose entity, which will requireconsolidation due to contractual or financial arrangements other thanvoting interests.B A variable interest entity can take the form of a partnership, limited liabilitycompany or trust-type arrangement.1 A potential VIE must be a separate entity, not a subset, branch or division ofanother entity.2Pensions and certain other entities are specifically excluded.C The FASB’s definition of VIEs requiring consolidation encompasses situations wherea company may only own a minimal voting equity interest, but be contractuallyrequired to provide additional financial support in the event of future operatinglosses.D Primary beneficiaries are required to consolidate VIEs.1An enterprise shall consolidate a VIE if it has a variable interest that will absorb a majority of the VIE’s expected losses, receive a majority of theVIE’s expected returns, or both.2If one entity will rece ive the majority of a VIE’s losses, and another the majority of residual returns, the one absorbing the losses consolidates the VIE.E All enterprises holding a significant interest in a VIE must provide certaindisclosures.1 The primary beneficiaries of a VIE must provide more extensive disclosuresthan the other enterprises not deemed the primary beneficiary.F The primary beneficiary consolidates based on fair value on the date they becomeprimary beneficiary.1If the primary beneficiary has transferred assets to the VIE, they aretransferred at book value and no gain or loss is recorded on the transfer.©2009 Pearson Education, Inc. publishing as Prentice Hall 1202Goodwill may be recorded only if the VIE is a business (as defined in FIN 46(R)). Otherwise, any excess of consideration paid over fair value of assets istreated as an extraordinary loss.3Estimating fair value may be challenging if the VIE invests in unique assets;firms may need to use expected future cash flows as a means of estimating fairvalue.ELECTRONIC SUPPLEMENTThis provided a discussion of how consolidation might be altered if a current cost approach were adopted.©2009 Pearson Education, Inc. publishing as Prentice Hall 121Description of assignment material Minutes Questions (12)Exercises (13)E11-1 7 MC general questions (parent company and entity theories) 14 E11-2 5 MC general questions (Joint ventures) 10 E11-3 5 MC problem-type questions (parent company and entity theories) 20 E11-4 [Pond/Staff] Computations (parent company and entity theories) 20 E11-5 [Perry/Shelly] Computations under parent company and entity theories 20(fair-book value differentials)E11-6 [Polak/Stahl] Computations under parent company, entity and contemporary 20 theories (mid-year acquisition and goodwill)E11-7 [Palumbo/Seal] Computations under parent company and entity theories15 (upstream sales)E11-8 [Palid/Stark] Compute consolidated net income under the three theories 15 (upstream and downstream sales)E11-9 [Pioneer/Security] Journal entries for push-down accounting (parent 20 company and entity theories)E11-10 [Sun-Belt] Determine investment income for venturers of a corporate 12 joint ventureE11-11 [Martin] Determine amount of noncontrolling expense to appear in 15 consolidated income statementE11-12 [Paxel/Polo] Required financial reporting and disclosure requirements for 15a VIEE11-13 [Jennifer/Laura] Determine the primary beneficiary of a VIE 10 Problems (12)P11-1 [Picody/Scone] Consolidated balance sheets (parent company and entity 30 theories)P11-2 [Pisces/Scorpio] Consolidated balance sheet and income statement under 30 entity theoryP11-3 [Palace/Sign] Computations (parent company and entity theories) 30 P11-4 [Pierre/Smedley] Comparative consolidated financial statements under 50 alternative theories (goodwill and intercompany inventory sale)P11-5 [Packard/Studs] Comparative balance sheets under traditional and 40entity theories (goodwill and upstream inventory sale)P11-6 AICPA [X/Y] Computations and explanations (separate company 70 and consolidated financial statements given - entity theory)P11-7 [Played/Splash] Prepare a journal entry to record the push down, prepare a 30 subsidiary balance sheet, and determine investment income for a 100%owned subsidiaryP11-8 [Parker/Sanue] Journal entries and calculations for push-down accounting 30 with noncontrolling interest©2009 Pearson Education, Inc. publishing as Prentice Hall 122P11-9 [Power/Swing] Journal entries and comparative balance sheets at acquisition 25 for push-down accounting at acquisitionP11-10 [Power/Swing] Two consolidation working papers one year after combination 70 under push-down accounting (both 90% and 100% ownership assumptions)P11-11 [Pepper/Jerry] Working papers for proportionate consolidation (joint venture) 50 Internet assignmentUsing the Corning, Incorporated 2006 annual report from the website, prepare asummary of joint venture activities.Illustration 11-1©2009 Pearson Education, Inc. publishing as Prentice Hall 123COMPARISON OF PARENT COMPANY THEORY AND ENTITY THEORYASSET VALUATIONPet Company acquires a 90% interest in Sam Company for $63,000 on January 1, 20X2. Book values and fair values of Sam’s assets and equities are summarized as follows:Book Value Fair Value Difference Other current assets $40,000 $40,000Inventories 15,000 20,000 $5,000 Plant assets-net 30,000 38,000 8,000 Total assets $85,000 $98,000Liabilities $38,000 $38,000Capital stock $10 par 25,000Retained earnings 22,000Total equities $85,000Allocation of Purchase Price under Parent Company Theory: The parent’s share of subsidiary assets and liabilities are revalued.Cost $63,000 Book value acquired ($47,000 x 90%) 42,300 Excess cost over book value acquired $20,700 Excess allocated to:Inventories ($5,000 x 90%) $ 4,500 Plant assets-net ($8,000 x 90%) 7,200 Remainder to goodwill 9,000 Excess cost over book value acquired $20,700Allocation of Purchase Price under Entity Theory: A total implied value for the subsidiary's assets and liabilities is computed based on the price paid for the parent’s 90% share.Implied value of Sam ($63,000/90%) $70,000 Boo k value of Sam’s net assets47,000 Excess implied value over book value $23,000 Excess allocated to:Inventory (100% of difference) $ 5,000 Plant assets-net (100% of difference) 8,000 Remainder to goodwill 10,000 Excess implied value over book value $23,000 ©2009 Pearson Education, Inc. publishing as Prentice Hall 124Consolidated Balance Sheets at Acquisitioninterest ($63,000 / 90%) x 10% = $7,000.©2009 Pearson Education, Inc. publishing as Prentice Hall 125Important points from the illustration:1Goodwill. Goodwill can be determined independently. Under entity theory, goodwill is the difference between the total implied value of Sam’s net assets ($70,000) an d the fair value of Sam’s net assets ($60,000). Under parent company theory, goodwill is thedifference between the investment cost ($63,000) and the fair value acquired ($60,000 x 90%).2Asset and liability valuations. Consolidated net assets are $2,300 greater under entity theory ($100,000) than under parent company theory ($97,700).* Consolidated net assets under parent company theory consist of the combined book values of Pet and Sam’s net assets plus 90% of the excess of fair value ofSam’s n et assets over the book value of those assets.* Consolidated net assets under entity theory consist of the book value of Pet’s net assets plus the fair value of Sam’s net assets.3Stockholders’ equity. On the consolidated balance sheet, capital stock and retained earnings (the majority interest in consolidated net assets) are the same under parentcompany and entity theories.4Noncontrolling interest. The $2,300 difference in the value of consolidated net assets under parent company and entity theories lies in the measurement of noncontrollinginterest ($7,000 under entity theory and $4,700 under parent company theory. If there is no noncontrolling interest, there are no differences in the value of consolidated netassets among the three theories.5Under parent company theory, the purchase price is allocated to the fair values of the identifiable assets and goodwill acquired. Under entity theory, the total fair value of the entity implied by the purchase price is allocated to the fair values of the identifiable net assets and to goodwill.©2009 Pearson Education, Inc. publishing as Prentice Hall 126Illustration 11-2PUSH-DOWN ACCOUNTINGUNDER PARENT COMPANY AND ENTITY THEORIES Assumptions1Pip Company acquires a 90% interest in Ski Company for $585,000 on January 1, 20X2. 2Book values and fair va lues of Ski’s assets and liabilities are summarized as follows:Book Value Fair Value DifferenceCurrent assets $240,000 $240,000Land 100,000 120,000 $20,000Buildings-net 250,000 300,000 50,000 Equipment-net 300,000 270,000 (30,000)Total assets $890,000 $930,000Liabilities $380,000 $380,000Capital stock $10 par 300,000Retained earnings 210,000Total equities $890,000Goodwill can be computed independently as follows:Parent company theoryCost of 90% interest $585,000Fair value of interest acquired ($550,000 x 90%) 495,000Goodwill $ 90,000Entity theoryImplied value of Ski ($585,000 / 90%) $650,000Fair value of Ski 550,000Goodwill $100,000©2009 Pearson Education, Inc. publishing as Prentice Hall 127Parent company theory allocation schedule:Cost $585,000 Book value acquired ($510,000 x 90%) 459,000 Excess cost over book value acquired $126,000 Excess allocated to:Land ($20,000 x 90%) $ 18,000 Buildings-net ($50,000 x 90%) 45,000 Equipment-net (-$30,000 x 90%) (27,000) Goodwill 90,000 Excess cost over book value acquired $126,000Push-down entry under parent company theory is recorded on Ski’s books:Land $ 18,000Buildings-net 45,000Goodwill 90,000Retained earnings 210,000Equipment $ 27,000Push-down capital 336,000 Entity theory allocation schedule:Implied value of Ski ($585,000 / 90%) $650,000 Book value of Ski’s net assets 510,000 Excess implied value over book value acquired $140,000 Excess allocated to:Land $ 20,000 Buildings-net 50,000 Equipment-net (30,000) Goodwill 100,000 Excess implied value over book value acquired $140,000 Push-down entry under entity theory is recorded on Ski’s books:Land $ 20,000Buildings-net 50,000Goodwill 100,000Retained earnings 210,000Equipment-net $ 30,000Push-down capital 350,000 ©2009 Pearson Education, Inc. publishing as Prentice Hall 128。
高级会计学(第10版)习题答案 ch18_Beams10e_sm
Chapter 18AN INTRODUCTION TO ACCOUNTING FOR STATE AND LOCALGOVERNMENTAL UNITSQuestions1 The Governmental Accounting Standards Board has primary responsibility for setting standards thatprovide GAAP for state and local governmental units. The most authoritative literature includes GASB Statements of Standards and GASB Interpretations. The second level of authoritative literature includes GASB Technical Bulletins and those AICPA audit and accounting guides and statements of position that the AICPA intended to make applicable to governments and that the GASB has cleared.Before 1984, the Municipal Finance Officers Association (MFOA) and its National Committee on Governmental Accounting provided guidance via the publication of Municipal Accounting and Auditing in 1951 and Governmental Accounting, Auditing, and Financial Reporting(GAAFR) in 1968. Since 1974, the AICPA has also issued industry audit guides for audits of state and local governmental units.2 The Municipal Finance Officers Association (MFOA), now referred to as the Government Finance OfficersAssociation (GFOA), first issued Governmental Accounting, Auditing, and Financial Report (GAAFR) in 1968. For many years, this resource book – often referred to as the Blue Book due to its distinctive blue cover - constituted the most complete frameworks of accounting principles specific to governmental units, and provided standards for preparing and evaluating the financial reports of governmental units. Updated periodically to reflect changes to governmental accounting, the 2005 GAAFR is the most recent version.3 A ccording to the AICPA’s Audit and Accounting Guide, a governmental entity is generally created for theadministration of public affairs and has one or more of the following characteristics:▪ Popular election of officers or appointment (or approval) of a controlling majority of the members of the organization’s governing body by officials of one or more state or localgovernments;▪ The potential for unilateral dissolution by a gover nment with the net assets reverting to a government; or▪ The power to enact or enforce a tax.An organization may also be classified as a governmental entity if it possesses the ability to issue debt that is exempt from federal taxation.4 A fund is a separate fiscal and accounting entity with a self-balancing set of accounts, “segregated for thepurpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations.” [GASB Codification] Fund accounting facilitates budgetary control.A governmental unit may have hundreds of funds, but only eight fund types. The Codificationdiscusses three fund categories (governmental, proprietary, and fiduciary) and eight fund types (general, special revenue, permanent, capital projects, debt service, internal service, enterprise, and trust and agency funds).5 Governmental funds are “expendable” or “source and disposition” funds through which mostgovernmental functions are financed. These funds are essentially working capital entities. They include the general fund, special revenue funds, permanent funds, capital projects funds, and debt service funds.Proprietary funds are “nonexpendable” or “commercial type” funds used to account for ongo ing activities that are similar to those found in private enterprise. They use the business accounting equation and their reporting parallels that of a business entity in most regards. They include two fund types—enterprise funds and internal service funds.Fiduciary funds are used to account for assets held by the governmental unit as trustee or agent for individuals, private organizations, and other governmental units. Fiduciary funds include trust funds (pension, investment, and private purpose) and agency funds.© 2009 Pearson Education, Inc. publishing as Prentice Hall18-26 The five types of governmental funds are the general fund, permanent funds, special revenue funds, capitalprojects funds, and debt service funds. Each is a working capital entity, therefore, each is used to account for a portion of a govern ment’s general government working capital. They are distinguished by the purpose for which the resources of each fund may (must) be used. Working capital to be used for construction/acquisition of major general government fixed assets should be accounted for in capital projects funds; that to be used to pay principal and interest on general long-term debt should be accounted for in debt service funds. Special revenue funds are used to account for portions of working capital to be used for other specific general operating purposes. Permanent funds report resources that are legally restricted to the extent that only earnings, and not principal, may be used for purposes that support the reporting government’s programs—that is, for the benefit of the government of its citizenry.7 The governmental fund accounting equation is:Current Assets - Current Liabilities = Fund Balance8 The two types of proprietary funds are enterprise funds and internal service funds. Both charge fees fortheir services that are intended to recover part, if not all, of the costs of providing goods or services. The key distinction between the two is that the predominant customers of internal service funds are other departments or agencies of the government, whereas the predominant customers of enterprise funds are outside entities or individuals.9 The accounting equation for a proprietary fund is essentially the business accounting equation—10 Under the modified accrual basis of accounting, fixed assets are not recorded in the general fund, becausegeneral fixed assets do not represent financial resources available for current expenditures, i.e., they are not working capital items. In the fund financial statements, the general fund is used to account for unrestricted resources that can be expended currently for operating purposes. Since fixed assets result from expending resources for long-term needs, they are not included in the fund financial statements.With the advent of GASB 34, the general fund is reported in the governmentwide statements under the accrual basis of accounting. General fund fixed assets – which have typically been documented informally in the accounting records and noted in the old general fixed asset account group – will appear in the governmentwide statement of net assets.11Modified accrual accounting is the system of accounting in which revenues are recognized in the accounting period in which they become available and measurable and expenditures are recognized in the accounting period in which the related fund liability is incurred and objectively measurable. Unmatured interest on general long-term debt is an exception for which the expenditure is recognized when due.Modified accrual accounting applies to governmental funds (general fund, special revenue funds, permanent funds, debt service funds, and capital projects funds) and to asset and liability accounting for agency funds.12 Governmental and proprietary funds use different focuses when measuring financial positions andoperating results in the fund financial statements. The two types of focuses are the “economic resources”measurement focus and the “flow of current financial resources” meas urement focus. The accrual basis (used with proprietary funds and trust funds) refers to recognition of revenues and expenses as in business accounting and follows the economic resources measurement focus, whereby all economic resources, whether current or noncurrent, are reported. The modified accrual basis of accounting (used with governmental funds) is consistent with a flow of current financial resources measurement focus, whereby funds report on current resources and current obligations.Under GASB 34, both governmental funds and proprietary funds use the accrual basis of accounting and the “economic resources” measurement focus in the governmentwide statements.18-3 13 Governmental revenue sources, addressed in GASB 33, are varied and include taxes, grant receipts, andcollections of user fees and fines. Exchange transactions are those “in which each party receives and gives up essentially equal values.”Nonexchange transactions are those “in which a government gives (or receives) value without directl y receiving (or giving) equal value in exchange.” Many of the transactions in governmental funds are nonexchange in nature, because general governmental activities often address the needs of the public and are funded by taxpayers who generally do not receive benefits in direct relation to their tax payments.14 A short term note payable will generally be paid with current resources, thus it is accounted for as aliability of the governmental fund. Long-term debt is not included in the fund financial statements, since it will be repaid with future, not current financial resources. The long term debt will, however, appear as a liability in the governmentwide statement of net assets. This is one of the reconciling items between the fund and governmentwide statements.15 Interfund transfers are not expenditures or expenses, and they are classified separately from revenues,expenditures, and expenses in the financial statements of the various funds. Interfund transfers are essentially shifts of resources between funds, not costs or liabilities incurred by the entity. Interfund transfers consist of residual equity transfers(nonrecurring or nonroutine transfers of equity between funds) and operating transfers(all other legally authorized transfers between funds). Interfund transactions that would be treated as revenues, expenditures, or expenses if they involved an external entity are not interfund transfers, but rather are quasi-external transactions and are treated as revenue, expenditures, or expenses in the normal fashion.16An appropriation is an authorization from the legislative body to make expenditures for specified purposes. If approval by the legislative body is for each detailed expenditure item in the budget (a line-item budget), the legislative body will have maximum control because each detailed change would require legislative approval. If the budget is approved in total or by major categories but not for each detailed item, the city manager (or other chief executive) can shift resources within the categories approved without legislative approval. An appropriation by department, for example, permits a city manager to shift appropriations for police supplies to police equipment or overtime pay without legislative approval.17Under GASB 34, the governmental and proprietary fund financial statements of a general-purpose government include the following:Fund financial statementsGovernmental FundsBalance sheet – governmental funds (modified accrual basis)Statement of revenues, expenditures, and changes in fund balances (modified accrualbasis)Proprietary FundsStatement of net assets (accrual basis)Statement of revenues, expenses, and changes in net assets (accrual basis)Statement of cash flows (accrual basis, direct method)18 A reciprocal transfer is one which is expected to be repaid by the fund borrowing the money; whereas witha nonreciprocal transfer repayment is not expected.19 The GAAP Guidelines, listed in descending order of authority are as follows:1. GASB Statements and GASB Interpretations. This category also includes AICPA and FASBpronouncements made applicable to state and local governments by a GASB Statement orInterpretation.2. GASB Technical Bulletins. This category also includes AICPA Industry Audit and AccountingGuides and Statements of Position if specifically made applicable to state and local governmentsby the AICPA and cleared by the GASB.18-43. Consensus positions of GASB’s Emerging Issues Task Force (EITF) and AICPA PracticeBulletins if specifically made applicable to state and local governments by the AICPA andcleared by the GASB.4. Implementations Guides published by the GASB staff and industry practices that are widelyrecognized and prevalent in state and local government.5. Other accounting literature (including FASB standards not made applicable to governments bya GASB standard).GASB statements are the most authoritative.20 Interfund loans are loans that are made by one fund to another and must be repaid. Interfund transfersoccur when one fund provides resources to another for legally authorized purposes (an operating transfer) or when one fund helps to establish or enhance another (a residual equity transfer). Interfund services provided and used include sales and purchases between funds at approximate external market value. An interfund reimbursement is necessary when an expenditure applicable to one fund is made by a different fund.21 Expenses reflect the cost of assets or services used by an entity, and they are recognized in the periodincurred. Expenditures, unique to government accounting, typically reflect the use of governmental fund working capital. Proprietary funds recognize expenses, whereas governmental funds recognize expenditures.22 A comprehensive annual financial report(CAFR) contains three major sections—introductory, financialand statistical. The introductory section of a CAFR includes a table of contents, a letter of transmittal, a list of principal officers, and an organizational chart. The financial section includes the management’s discussion and analysis, the auditor’s report, the government-wide financial statements, and the fund financial statements. The statistical section contains statistical tables with comparative data from several periods of time.23 Fiscal accountability is the responsibility of a government to demonstrate compliance with publicdecisions regarding the use of financial resources. Operational accountability measures the extent of a government’s success at meeting operating objectives efficiently and effectively and its ability to meet operating objectives in the future.SOLUTIONS TO EXERCISESE18-3E18-1E18-2[AICPA adapted]1 c 1 d 1 b2 a 2 c 2 a3 c 3 c 3 a4 d 4 a 4 d5 d 5 c 5 b18-5 E18-4E18-5 E18-61 c 1 c 1 trust and agency funds2 b 2 b 2 enterprise funds3 d 3 d 3 general funds4 c 4 b 4 debt service funds5 d 5 d 5 permanent funds6 special revenue funds7 internal service funds8 capital projects fundsE18-7E18-8E18-91debt service fund2permanent fund3special revenue fund4agency fund5capital projects fund, debt service fundE18-101capital projects fund, debt service fund2internal service fund3enterprise fund4special revenue fund5general fundE18-111pension trust fund2enterprise fund3internal service fund4general fund5general fund (may also be allocated to other funds after collection) E18-12E18-13。
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Chapter 1BUSINESS COMBINATIONSAnswers to Questions1 A business combination is a union of business entities in which two or more previouslyseparate and independent companies are brought under the control of a single management team. F ASB 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.2The 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 independentcompanies 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.4Goodwill 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 F ASB 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 theidentifiable net assets acquired. The acquirer records the gain from a bargain purchase amount as an extraordinary gain during the period of the acquisition, under F ASB Statement No. 141R.SOLUTIONS TO EXERCISESSolution E1-11 a2 b3 a4 a5 dSolution E1-2 [AICPA adapted]1 aPlant and equipment should be recorded at the $55,000 fair value.2 cInvestment cost $800,000Less: Fair value of net assetsCash $ 80,000Inventory 190,000Property and equipment—net 560,000Liabilities (180,000) 650,000Goodwill $150,000Solution E1-3Stockholders’ equity—Pillow Corporation on January 3Capital stock, $10 par, 300,000 shares outstanding $3,000,000Additional paid-in capital[$200,000 + $1,500,000 – $5,000] 1,695,000Retained earnings 600,000 Total stockholders’ equity$5,295,000Entry to record combinationInvestment in Sleep-bank 3,000,000 Capital stock, $10 par 1,500,000 Additional paid-in capital 1,500,000Investment expense 10,000Additional paid-in capital 5,000 Cash 15,000Check: Net assets per books $3,800,000Goodwill 1,510,000Less: Expense of direct costs (10,000)Less: Issuance of stock (5,000)$5,295,000Journal entries on IceAge’s books to record the acquisitionInvestment in Jester 2,550,000Common stock, $10 par 1,200,000Additional paid-in capital 1,350,000To 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 15,000Investment expenses 45,000Other assets 60,000To 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 1,100,000Plant assets 2,200,000Liabilities 300,000Investment in Jester 3,000,000To 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 $2,550,000Fair value acquired 3,000,000Bargain purchase amount $ 450,000Investment in Jester 450,000Gain from bargain purchase 450,000To record gain from bargain purchase.Journal entries on the books of Danders Corporation to record merger with Harrison CorporationInvestment in Harrison 530,000Common stock, $10 par 180,000Additional paid-in capital 150,000Cash 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 70,000Additional paid-in capital 30,000Cash 100,000 To record costs of registering and issuing securities and additionaldirect costs of combination.Cash 40,000Inventories 100,000Other current assets 20,000Plant assets—net 280,000Goodwill 160,000Current liabilities 30,000Other liabilities 40,000Investment in Harrison 530,000To 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 $530,000Fair value of assets acquired 370,000Goodwill $160,000SOLUTIONS TO PROBLEMSSolution P1-1Preliminary computationsFair 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 $160,000Excess allocated to:Current assets $ 40,000 Remainder to goodwill 120,000 Excess fair value over book value $160,000Note: $25,000 direct costs of combination are expensed. Theexcess fair value of Pine’s buildings is not considered.Pine CorporationBalance Sheet at January 2, 2009AssetsCurrent assets($130,000 + $60,000 + $40,000 excess - $40,000 direct costs) $ 190,000Land ($50,000 + $100,000) 150,000Buildings—net ($300,000 + $100,000) 400,000Equipment—net ($220,000 + $240,000) 460,000Goodwill 120,000 Total assets $1,320,000Liabilities and Stockholders’ EquityCurrent liabilities ($50,000 + $60,000) $ 110,000Common stock, $10 par ($500,000 + $300,000) 800,000Additional paid-in capital335,000 [$50,000 + ($10 30,000 shares) — $15,000 costs of issuingand registering securities]Retained earnings (subtract $25,000 expensed direct cost) 75,000 Total liabilities and stockholders’ equity$1,320,000Solution P1-2Preliminary computationsFair Value: Cost of acquiring Seabird $825,000 Fair value of assets acquired and liabilities assumed 670,000 Goodwill from acquisition of Seabird $155,000Pelican CorporationBalance Sheetat January 2, 2009AssetsCurrent assetsCash [$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 assetsLand [$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] 750,000Goodwill 155,000 Total assets $3,705,000Liabilities and Stockholders’ EquityLiabilitiesAccounts payable [$300,000 + $40,000] $ 340,000 Note payable [$600,000 + $180,000 fair value] 780,000 Stockholders’ equityCapital stock, $10 par [$800,000 + (33,000 shares $10)] 1,130,000Other paid-in capital[$600,000 - $40,000 + ($825,000 - $330,000)] 1,055,000Retained earnings (subtract $100,000 expensed direct costs) 400,000 Total liabilities and stockholders’ equity$3,705,000Solution P1-3Persis issues 25,000 shares of stock for Sineco’s outstanding shares1a Investment in Sineco 750,000Capital stock, $10 par 250,000Other paid-in capital 500,000 To record issuance of 25,000, $10 par shares with a market price of $30 per share in abusiness combination with Sineco.Investment expenses 30,000Other paid-in capital 20,000Cash 50,000 To record costs of combination in a business combination with Sineco.Cash 10,000Inventories 60,000Other current assets 100,000Land 100,000Plant and equipment—net 350,000Goodwill 180,000Liabilities 50,000Investment in Sineco 750,000To record allocation of investment cost to identifiable assets and liabilities according to theirfair values and the remainder to goodwill. Goodwill is computed: $750,000 cost - $570,000fair value of net assets acquired.1b Persis CorporationBalance SheetJanuary 2, 2009(after business combination)AssetsCash [$70,000 + $10,000] $ 80,000Inventories [$50,000 + $60,000] 110,000Other current assets [$100,000 + $100,000] 200,000Land [$80,000 + $100,000] 180,000Plant and equipment—net [$650,000 + $350,000] 1,000,000Goodwill 160,000Total assets $1,750,000Liabilities and Stockh olders’ EquityLiabilities [$200,000 + $50,000] $ 250,000Capital 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$1,750,000Solution P1-3 (continued)Persis issues 15,000 shares of stock for Sineco’s outstanding shares2a Investment in Sineco (15,000 shares $30) 450,000Capital stock, $10 par 150,000Other 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 30,000Other paid-in capital 20,000Cash 50,000 To record costs of combination in the acquisition of Sineco.Cash 10,000Inventories 60,000Other current assets 100,000Land 100,000Plant and equipment—net 350,000Liabilities 50,000Investment in Sineco 570,000 To record Sineco’s net assets at fair v alues.Investment in Sineco 120,000Gain on bargain purchase 120,000To record gain on bargain purchase and adjust Investment inSineco to reflect total fair value.Fair value of net assets acquired $570,000Investment cost (Fair value of consideration) 450,000 Gain on Bargain Purchase $120,0002b Persis CorporationBalance SheetJanuary 2, 2009(after business combination)AssetsCash [$70,000 + $10,000] $ 80,000Inventories [$50,000 + $60,000] 110,000Other current assets [$100,000 + $100,000] 200,000Land [$80,000 + $100,000] 180,000Plant and equipment—net [$650,000 + $350,000]1,000,000Total assets $1,570,000 Liabilities and stockholders’ equityLiabilities [$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] 480,000190,000 Retained earnings (subtract $30,000 direct costsand add $120,000 Gain from bargain purchase)Total liabilities and stockholders’ equity$1,570,000Solution P1-41Schedule to allocate investment cost to assets and liabilitiesInvestment cost (fair value), January 1 $300,000Fair value acquired from Sen ($360,000 100%) 360,000 Excess fair value over cost (bargain purchase gain) $ 60,000Allocation:AllocationCash $ 10,000Receivables—net 20,000Inventories 30,000Land 100,000Buildings—net 150,000Equipment—net 150,000Accounts payable (30,000)Other liabilities (70,000)Gain on bargain purchase (60,000)Totals $ 300,0002Phule CorporationBalance Sheetat January 1, 2009(after combination)Assets LiabilitiesCash $ 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 350,000Equipment—net 330,000 Stockholders’ EquityCapital stock, $10 par 300,000Other paid-in capital 100,000Retained earnings* 170,000Stockholders’ equity510,000 Total assets$1,060,000 Total equities $1,060,000* Retained earnings reflects the $60,000 gain on the bargain purchase.Solution P1-51 Journal entries to record the acquisition of Dawn CorporationInvestment in Dawn 2,500,000Capital stock, $10 par 1,000,000Other paid-in capital 1,000,000Cash 500,000 To record acquisition of Dawn for 100,000 shares of common stock and $500,000 cash.Investment expense 100,000Other paid-in capital 50,000Cash 150,000 To record payment of costs to register and issue the shares of stock ($50,000) and other costsof combination ($100,000).Cash 240,000Accounts receivable 360,000Notes receivable 300,000Inventories 500,000Other current assets 200,000Land 200,000Buildings 1,200,000Equipment 600,000Accounts payable 300,000Mortgage payable, 10% 600,000Investment in Dawn 2,700,000To record the net assets of Dawn at fair value.Investment in Dawn 200,000Gain on bargain purchase 200,000 To adjust Investment account to total fair value and recognizethe gain from the bargain purchase.Gain on Bargain Purchase CalculationAcquisition price $2,500,000Fair value of net assets acquired 2,700,000 Gain on bargain purchase $ 200,000Solution P1-5 (continued)2Celistia CorporationBalance Sheetat January 2, 2009(after business combination)AssetsCurrent AssetsCash $ 2,590,000Accounts receivable—net 1,660,000Notes receivable—net 1,800,000Inventories 3,000,000Other current assets 900,000 $ 9,950,000Plant AssetsLand $ 2,200,000Buildings—net 10,200,000Equipment—net 10,600,000 23,000,000Total assets $32,950,000 Liabilities and Stoc kholders’ EquityLiabilitiesAccounts payable $ 1,300,000Mortgage payable, 10% 5,600,000 $ 6,900,000Stockholders’ EquityCapital stock, $10 par $11,000,000Other paid-in capital 8,950,000Retained earnings* 6,000,000 26,050,000Total liabilities and stockholders’ equity$32,950,000* Subtract $100,000 direct combination costs and add $200,000 gain on bargainpurchase.RESEARCH CASE1.Journal entry to record the acquisition (in millions of $)Investment in Target 50,000Common stock, $0.10 par 100Additional paid-in capital 49,900 To record acquisition of Target for 1 billion shares of common stock having a fair value of $50per share.Cash 240,000Accounts receivable 360,000Notes receivable 300,000Inventories 500,000Other current assets 200,000Land 190,000Buildings 1,140,000Equipment 570,000Accounts payable 300,000Mortgage payable, 10% 600,000Investment in Target 2,600,000Assign the excess of fair value over book value of assets and liabilities as shown in thefollowing allocation schedule:Acquisition price $50,000 Excess fair value of assets acquiredInventory (10%) 625Land (20%) 987Buildings and improvements (20%) 3,222Fixtures and equipment (20%) 711Computer hardware and software (20%) 43821,859 Goodwill $ 28,1412.Consolidated Balance Sheet at January 31, 2007(millions, except footnotes) WAL-MART TARGET DR CR CONSOLI-DATED AssetsCash and cash equivalents 7,373 813 8,186 Accounts receivable, net 2,840 6,194 9,034 Inventory 33,685 6,254 625 40,564 Other current assets 2,690 1,445 4,135 Total current assets 46,588 14,706 61,294 Property and equipmentLand 18,612 4,934 987 24,533 Buildings and improvements 64,052 16,110 3,222 83,384 Fixtures and equipment 25,168 3,553 711 29,432 Computer hardware and software 2,188 438 2,626 Construction-in-progress 1,596 1,596 Transportation equipment 1,966 1,966 Accumulated depreciation (24,408) (6,950) (31,358) Property and equipment, net 85,390 21,431 106,821 Property Under Capital Lease 5,392 5,392 Less: Accumulated amortization (2,342) (2,342) Property Under Lease - net 3,050 3,050 Goodwill 13,759 28,141 41,900 Investment in Target 50,000 50,000 0 Other non-current assets 2,406 1,212 3,618 Total assets 201,193 37,349 238,542Liabilities and shareholders' investmentCommercial Paper 2,570 2,570 Accounts payable 28,090 6,575 34,665 Accrued and other current liabilities 14,675 2,758 17,433Income taxes payable 706 422 1,128Current portion of long-term debt and notes payable 5,428 1,362 6,790Current obligations capital leases 285 285 Total current liabilities 51,754 11,117 62,871Long-term debt 27,222 8,675 35,897Long term capital leases 3,513 3,513 Deferred income taxes 4,971 577 5,548 Noncontrolling Interest 2,160 2,160Other non-current liabilities 1,347 1,347 Shareholders' investmentCommon stock 513 72 72 513Additional paid-in-capital 52,734 2,387 2,387 52,734 Retained earnings 55,818 13,417 13,417 55,818 Accumulated other comprehensive income (loss) 2,508 (243) 2,265 Total shareholders' investment 111,573 15,633 127,206 Total liabilities and shareholders' investment 201,193 37,349 50,000 50,000 238,542Chapter 2STOCK INVESTMENTS — INVESTOR ACCOUNTING AND REPORTINGAnswers to Questions1Only the investor’s accounts are affected when outstanding stock is acquired from existing stockholders. The investor records the investment at its cost. Since the investee company is not a party to the transaction, its accounts are not affected.Both investor and investee accounts are affected when unissued stock is acquired directly from the investee. The investor records the investment at its cost and the investee adjusts its asset and owners’ equity accounts to reflect the issuance of previously unissued stock.2Goodwill arising from an equity investment of 20 percent or more is not recorded separately from the investment account. Under the equity method, the investment is presented on one line of the balance sheet in accordance with the one-line consolidation concept.3Dividends received from earnings accumulated before an investment is acquired are treated as decreases in the investment account balance under the fair value/cost method.Such dividends are considered a return of a part of the original investment.4The equity method of accounting for investments increases the investment account for the investor’s share of the investee’s income and decreases it for the investor’s share of the investee’s losses and for dividends received from the investee. In addition, the investment and investment income accounts are adjusted for amortization of any investment cost-book value differentials related to the interest acquired. Adjustments to the investment and investment income accounts are also needed for unrealized profits and losses from transactions between the investor and investee companies. A fair value adjustment is optional under SFAS No. 159.5The equity method is referred to as a one-line consolidation because the investment account is reported on one line of the investor’s balance sheet and investment income is reported on one line of the investor’s income statement (except when the i nvestee has extraordinary or cumulative-effect type adjustments). In addition, the investment income is computed such that the parent company’s income and stockholders’ equity are equal to the consolidated net income and consolidated stockholders’ equity t hat would result if the statements of the investor and investee were consolidated.6If the equity method of accounting is applied correctly, the income of the parent company will generally equal the controlling interest share of consolidated net income.7The difference in the equity method and consolidation lies in the detail reported, but notin the amount of income reported. The equity method reports investment income on one line of the income statement whereas the details of revenues and expenses are reported in the consolidated income statement.8The investment account balance of the investor will equal underlying book value of the investee if (a) the equity method is correctly applied, (b) the investment was acquired at book value which was equal to fair value, the pooling method was used, or the cost-book value differentials have all been amortized, and (c) there have been no intercompany transactions between the affiliated companies that have created investment account-book value differences.9The investment account balance must be converted from the cost to the equity method when acquisitions increase the interest held to 20 percent or more. The amount of the adjustment is the difference between the investment income reported under the cost method in prior years and the income that would have been reported if the equity method of accounting had been used. Changes from the cost to the equity method of accounting for equity investments are changes in the reporting entity that require restatement of prior years’ financial statements when the effect is material.10The one-line consolidation is adjusted when the investee’s income includes extraordinary items, gains or losses from discontinued operations, or cumulative-effect type adjustments.In thi s case, the investor’s share of the investee’s ordinary income is reported as investment income under a one-line consolidation, but the investor’s share of extraordinary items, cumulative-effect type adjustments, and gains and losses from discontinued operations is combined with similar items of the investor.11The remaining 15 percent interest in the investee is accounted for under the fair value/cost method, and the investment account balance immediately after the sale becomes the new cost basis.12Yes. When an investee has preferred stock in its capital structure, the investor has to allocate the investee’s income to preferred and common stockholders. Then, the investor takes up its share of the investee’s income allocated to common stockholders in apply ing the equity method. The allocation is not necessary when the investee has only common stock outstanding.13Goodwill impairment losses are calculated by business reporting units. For each reporting unit, the company must first determine the fair values of net assets. The fair value of thereporting unit is the amount at which it could be purchased in a current market transaction.This may be based on market prices, discounted cash flow analyses, or similar currenttransactions. This is done in the same manner as is done to originally record acombination. Any excess measured fair value is the fair value of goodwill. The companythen compares the goodwill fair value estimate to the carrying value of goodwill todetermine if there has been an impairment during the period.14Yes. Impairment losses for subsidiaries are computed as outlined in the solution to question 13. Companies compare fair values to book valuers for equity methodinvestments as a whole. Firms may recognize impairments for equity method investments as a whole, but perform no separate goodwill impairment.15Initial impairment losses recorded upon adoption of SFAS 142 are treated as the cumulative effect of an accounting change. Impairment losses resulting from subsequentannual reviews are included in the calculation of income from operations.1617 1819SOLUTIONS TO EXERCISESSolution E2-11 d2 c3 c4 d5 bSolution E2-2 [AICPA adapted]1 d2 b3 d4 bGrade’s investment is reported at its $300,000 cost because the equ ity method is notappropriate and because Grade’s share of Medium’s income exceeds dividends receivedsince acquisition [($260,000 ⨯15%) > $20,000].5 cDividends received from Zafacon for the two years were $10,500 ($70,000 ⨯15% - all in2009), but only $9,000 (15% of Zafacon’s income of $60,000 for the two years) can beshown on Torquel’s income statement as dividend income from the Zafacon investment.The remaining $1,500 reduces the investment account balance.6 c[$50,000 + $150,000 + ($300,000 ⨯10%)]7 a8 dInvestment balance January 2 $250,000 Add: Income from Pod ($100,000 ⨯30%) 30,000 Investment in Pod December 31 $280,000Solution E2-31B owman’s percentage ownership in TrevorBowman’s 20,000 shares/(60,000 + 20,000) shares = 25%2GoodwillInvestment cost $500,000 Book value ($1,000,000 + $500,000) ⨯25% (375,000)Goodwill $125,000 Solution E2-4Income from Medley for 2009Share of Medley’s income ($200,000 ⨯1/2 year ⨯30%) $ 30,0001Income from OakeyShare of Oakey’s reported income ($800,000 30%) $ 240,000 Less: Excess allocated to inventory (100,000)(50,000) Less: Depreciation of excess allocated to building($200,000/4 years)Income from Oakey $ 90,000 2Investment account balance at December 31Cost of investment in Oakey $2,000,000Add: Income from Oakey 90,000 Less: Dividends ($200,000 x 30%) (60,000) Investment in Oakey December 31 $2,030,000 Alternative solutionUnderlying equity in Oakey at January 1 ($1,500,000/.3) $5,000,000Income less dividends 600,000 Underlying equity December 31 5,600,000Interest owned 30% Book value of interest owned December 31 1,680,000Add: Unamortized excess 350,000 Investment in Oakey December 31 $2,030,000Solution E2-6Journal entry on Mar tin’s booksInvestment in Neighbors ($300,000 x 40%) 120,000Loss from discontinued operations 20,000Income from Kelly 140,000 To recognize income from 40% investment in Neighbors.1 aDividends received from Bennett ($120,000 ⨯15%) $ 18,000 Share of income since acquisition of interest2008 ($20,000 ⨯15%) (3,000)2009 ($80,000 ⨯15%) (12,000) Excess dividends received over share of income $ 3,000Investment in Bennett January 3, 2008 $ 50,000 Less: Excess dividends received over share of income (3,000) Investment in Bennett December 31, 2009 $ 47,0002 bCost of 10,000 of 40,000 shares outstanding $1,400,000Book value of 25% interest acquired ($4,000,000 stockholders’ equity at December31, 2008 +$1,400,000 from additional stock issuance) ⨯25% 1,350,000 Excess fair value over book value(goodwill) $ 50,0003 dThe investment in Monroe balance remains at the original cost.4 cIncome before extraordinary item $ 200,000 Percent owned 40% Income from Krazy Products $ 80,000Solution E2-8Preliminary computationsCost of 40% interest January 1, 2008 $2,400,000 Book value acquired ($4,000,000 ⨯40%) (1,600,000) Excess fair value over book value $ 800,000Excess allocated toInventories $100,000 ⨯40% $ 40,000 Equipment $200,000 ⨯40% 80,000 Goodwill for the remainder 680,000 Excess fair value over book value $ 800,000Raython’s underlying equity in Treaton ($5,500,000 ⨯40%) $2,200,000 Add: Goodwill 680,000Investment balance December 31, 2012 $2,880,000Alternative computationRaython’s share of the change in Treaton’s stockholders’equity ($1,500,000 ⨯40%) $ 600,000 Less: Excess allocated to inventories ($40,000 ⨯100%) (40,000) Less: Excess allocated to equipment ($80,000/4 years ⨯4 years) (80,000) Increase in investment account 480,000 Original investment 2,400,000 Investment balance December 31, 2012 $2,880,000Solution E2-91Income from RunnerShare of income to common ($400,000 - $30,000 preferreddividends) ⨯30% $ 111,0002Investment in Runner December 31, 2009NOTE: The $50,000 direct costs of acquiring the investment must be expensed whenincurred. They are not a part of the cost of the investment.Investment cost $1,200,000 Add: Income from Runner 111,000 Less: Dividends from Runner ($200,000 dividends - $30,000dividends to preferred) ⨯30% (51,000) Investment in Runner December 31, 2009 $1,260,000Solution E2-101Income from Tree ($300,000 – $200,000) ⨯25%Investment income October 1 to December 31 $ 25,0002Investment balance December 31Investment cost October 1 $ 600,000 Add: Income from Tree 25,000 Less: Dividends --- Investment in Tree at December 31 $ 625,000。