Module09Solutions - Cambridge Business Publishers, 2008...

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Unformatted text preview: Cambridge Business Publishers, 2008 Solutions Manual, Module 9 9-1 Module 9 M9-30 (10 minutes) a. A spin-off is a distribution of shares of a subsidiary to the companys shareholders in the form of a dividend. A split-off is the exchange of shares between the company and its shareholders. In a split-off, Bristol Myers shareholders would exchange their shares in the company for Zimmer shares owned by Bristol Myers. The end result of a spin-off and a split-off is the same economically (the shareholders end up owning the subsidiary directly rather than indirectly via the company), but the accounting differs. A spin-off is accounted for as a dividend . Both the investment account and the retained earnings account are reduced by the book value of the shares distributed. A split-off is accounted for like a purchase of treasury stock . The treasury stock account is increased and the equity method investment account is reduced (reflecting the distribution of that asset). The dollar amount recorded for this transaction depends on whether the split-off is a pro rata distribution or a non pro rata distribution. b. As is the case with all dividends, there is no effect on Bristol Myers income statement from the spin-off. The assets on Bristol Myers balance sheet are reduced by the book value of the Zimmer investment and its stockholders equity is reduced by the same amount through a reduction in retained earnings for the spin-off dividend. Cambridge Business Publishers, 2008 Financial Accounting for MBAs, 3rd Edition 9-2 E9-34 (15 minutes) Balance Sheet Income Statement Transaction Cash Asset + Noncash Assets = Liabil- ities + Contrib. Capital + Earned Capital Rev- enues Expen- ses = Net Income Cash 250,000 CS 10,000 APIC 240,000 250,000 10,000 240,000 Cash CS APIC Feb 20: Issued 10,000 shares of $1 par value common stock at $25 cash per share +250,000 Cash = +10,000 Common Stock +240,000 Additional Paid-in Capital Cash 4,125,000 PS 1,500,000 APIC 2,625,000 4,125,000 1,500,000 2 ,625,000 Cash PS APIC Feb 21: Issued...
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Module09Solutions - Cambridge Business Publishers, 2008...

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