ch14 - Chapter 14 - Solutions Overview: ProblemLength {S}...

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Chapter 14 - Solutions Overview: Problem Length Problem #s {S} 6 - 11 {M} 1 - 5 {L} 12 - 13 1.{M}a. Martin Sales (Amounts in $millions) Method 2000 2001 2002 Purchase method $435 $610 ($550 + $60) $1,120 ($970 + $150) Pooling method $525 ($435 + $90) $670 ($550 + $120) $1,120 (same) Under the purchase method, Martin's sales include Green's sales only following the acquisition. Under the pooling method, Green's sales are included for all periods, and 2000 must be restated. b. Under the purchase method (IASB GAAP): (i) The growth rate of reported sales is higher because past sales are not restated so that the addition of Green's sales following the merger increases reported sales. (ii) Return on equity is lower than under pooling. Income is reduced by higher depreciation as Green's property is recorded at its higher fair value, by higher interest expense due to amortization of the debt discount, and by amortization of any goodwill. Equity is increased by the market value of the additional Martin shares issued (under pooling, new Martin shares are added at book value). With lower income and higher equity, return on equity is reduced. (iii) Long-term debt-to-equity ratio is lower than under pooling. Debt is lower because, under the purchase method, Green's debt is recorded at its fair market value. Equity is increased by the market value of the additional Martin shares issued. With lower debt and higher equity, the ratio is reduced. 14- 1
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c. Under the purchase method (US GAAP): (i) The growth rate of reported sales is the same as reported under IASB GAAP. (ii) Return on year-end 2001 equity is higher than under IASB GAAP. Income is higher as there is no goodwill amortization. Equity is the same at the acquisition date, but slightly higher at year-end 2001 due to higher income. (iii) Long-term debt-to-equity ratio is the same as under IASB GAAP at the acquisition date. 2.{M}a. b. and d. Acetar Combined Balance Sheet End of Year 1 Year 2 Pooling Purchase Purchase Cash $ 150 $ 150 $ 200 Inventory 1,300 1,330 1,400 Fixed assets (net) 4,000 4,050 4,145 Goodwill 0 320 304 Total assets $5,450 $5,850 $6,049 Current liabilities 1,250 1,250 1,300 Equity 4,200 4,600 4,749 Total equities $5,450 $5,850 $6,049 Under the pooling method, the balance sheets of Ace and Tar are combined without adjustment. When Ace acquires Tar, and the purchase method is used, the assets and liabilities of Tar (but not Ace) are restated to fair value. The excess of the purchase price ($1,500) over the fair value of the net assets acquired ($1,180) is recorded as goodwill ($1,500 - $1,180 = $320). c. Year 2 reported income under the purchase method is $149, calculated as follows: Reported income under pooling $ 200 Less: increase in COGS due to Tar inventory write-up (30) additional depreciation of Tar due to fixed asset write-up ($50/10) (5) goodwill amortization ($320/20) (16 ) 14- 2
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Reported income under purchase method $ 149 d. Balance sheet shown above. Differences between last two columns (Year 2 changes) are: Cash increased by change in cash Inventory increase of $100 from pooling method cash flow statement less $30 additional COGS under purchase method.
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This note was uploaded on 04/15/2009 for the course ACCOUNTING BUSI0027 taught by Professor Guan during the Spring '09 term at HKU.

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ch14 - Chapter 14 - Solutions Overview: ProblemLength {S}...

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